Profit is the financial benefit realized when revenue from a business is higher than the costs and taxes involved in operating that business. Profits earned belong to the owners of the company, who can choose to either receive it as dividends or reinvest it back into the business. Profit is calculated as total revenue minus total expenses.
How can I use data about a company’s profit when investing in equities?
- You can use a company’s profit to gauge how its share price will grow in the future. The share price of a company with a growing profit can be expected to grow. This is because, with a higher profit, the company can choose to either reinvest the earnings to grow the company even more or to distribute dividends to its shareholders. For example, in Q2 2020, Goldman Sachs achieved a net profit of $3.62 billion, and its dividend payout ratio was 27.7%, which means it distributed approximately $1.003 billion of dividends. If its net profit in the next quarter increases to $5 billion and its dividend payout ratio remains the same, the total amount of dividend it is expected to distribute to its stockholders will increase to $1.385 billion.
- However, a high profit does not always contribute to a growth in share price if the revenue does not meet analysts’ or investors’ expectations. For example, in July 2020, after Google reported higher than expected earnings per share of $10.13, the stock price still fell by 4.5%, as its revenue declined 2%. The same situation happened with Bank of America Corporation’s third-quarter earnings, whereby its revenue was reported to be $20.45 billion, missing analyst’s expectations of $2.8 billion and causing a 5.3% dip in stock price. Other factors other than earnings could affect the stock price as well. Although Walmart reported a higher than expected second-quarter profit and revenue, its stock price still fell due to waning demand from a lack of economic stimulus amid the pandemic.
Debt to Equity Ratio
Used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.
Profit is the financial benefit realized when revenue from a business is higher than the costs and taxes involved in operating that business.
Alternative investment class composed of funds that invest directly in private companies or that buy public companies and take them private
Time of declining economic activity, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and sales.
A stimulus package is a coordinated effort by the government to increase spending and investment to "stimulate" an economy out of a downturn.
Shorting a stock
Trading strategy that tries to take advantage of the decline in a stock price by borrowing a stock and sell it now while planning to repurchase it later for a lower price.
Market-capitalization-weighted index tracking the performance of the 500 largest U.S. companies