Unexpected EarningsWhen a business or investments earns more or less than expected

Financial analysts employ certain techniques to predict the earnings that a business or investment is expected to generate.

That said, there’s no way to predict the exact amount but, with careful planning, businesses can usually forecast pretty accurately.

Even with careful planning, sometimes the unexpected may occur which causes a business or investment to generate an earnings figure that is very far from its expected amount.

It’d be great if the earnings figure is greater than the expected amount, but there’s also the possibility of it being less than the expected amount.

The primary purpose of a business is to generate profits after all.

So earning more than what you thought you would is always a welcome surprise.

But if it’s the other way around where the actual earnings are much less than the expected amount, then that is very unfortunate.

That’s a clear-cut indication that the business or investment underperformed.

That said, running a business already comes with many variables.

Not being able to project your revenue and expenses can be quite challenging.

So while a positive surprise is always welcome, it’s still more comfortable if your business is earning within its expected amount.

Still, it’s nice to prepare for the unexpected.

And that’s why in this article, we will be learning about unexpected earnings.

We’ll learn what differentiates them from expected earnings.

Lastly, we’ll be discussing how you can use the knowledge you gain from this article for your business.

What are Unexpected Earnings?

When a business or an investment generates an earnings amount that is very different from what was expected, then it has “unexpected earnings”.

The difference between the actual earnings and expected earnings is the business or investment’s unexpected earnings.

Due to the unexpected nature, this difference is also referred to as an “earnings surprise”.

Each period, analysts employ certain techniques to predict the expected earnings of a business or investment.

They base these predictions on several factors such as previous financial reports, current market conditions, as well as the business or investment’s financial behavior.

These predictions are not made out of thin air, which is why investors rely on them.

But, the unexpected can happen.

And that’s why the term “unexpected earnings” exists.

The “unexpected” aspect can either be positive or negative.

If the actual earnings are greater than the expected earnings, then there positive unexpected earnings.

If it’s the opposite where actual earnings are lesser than expected earnings, then this is considered negative unexpected earnings.

It’s important to take note of unexpected earnings as they can hugely affect a business or investment’s stock price.

Studies have shown that positive unexpected earnings can lead to an immediate increase in a stock’s price.

Not only that, but they can also result in a gradual increase over time.

So if you see the price of stock immediately rising, it could be that it’s performing better than expected.

Of course, negative unexpected earnings do the opposite.

They lead to a decline in the stock price, which could be immediate or gradual.

What Causes Unexpected Earnings?

While analysts oftentimes know what they’re doing, forecasting/predicting earnings or stock prices can still get quite tricky.

Sometimes, even with the various techniques that they employ, they can still make inaccurate predictions.

This can result in unexpected earnings due to an inaccurate figure for expected earnings.

However, unexpected earnings can also directly result from the business’s actions.

A business decision may positively or negatively affect its prospect on earnings, which can result in a different earnings amount from what was expected.

Unexpected earnings that directly result from a business’s actions can offer important insights into its stock’s future trajectory.

For example, an action that causes a public scandal will negatively affect a business’s prospective earnings, leading to negative unexpected earnings.

Unexpected earnings can also result from external factors, such as a change in the economic climate.

The recent global pandemic caused a stir in the financial world.

Some businesses financially suffered because of it.

They probably earned less than their expected earnings.

The Standardized Unexpected Earnings (SUE)

To determine a business or investment’s unexpected earnings, we can employ various techniques.

One of them is using the mathematical formula known as the standardized unexpected earnings or SUE.

The SUE explores the relationship between the performance of a business’s stock and its unexpected earnings.

Unexpected earnings can affect a stock’s price, which is why they are useful for stock trading.

And with the help of SUE, we can determine if a trading strategy is effective or not.

The SUE formula is as follows:

SUE = (EPS(Q1) – fEPS(Q1)) ÷ SD(Q1)

Where:

EPS(Q1) – the reported or actual earnings per share for a particular quarter

fEPS(Q1) – the forecasted or expected earning per share of a business for the same quarter as EPS(Q1)

SD(Q1) – the standard deviation of estimated earnings for the concerned quarter

 Seems like a pretty complicated formula huh? It’s the traders or analysts that often use the SUE formula.

What it does is that it enables them to get an understanding of the behavior of a stock’s price.

It may help them in predicting when the price might fall or rise, and whether or not the rise/fall is within the standard deviation of the expected price.

Expected Earnings

There’s no unexpected without the expected.

So let’s talk about what expected earnings are.

As the name implies, expected earnings refer to the earnings that a business or investment is expects to generate.

This figure isn’t something that is whimsically decided upon.

Analysts rely on several factors, such as the business or investment’s historical financial performance, or the current market condition.

They also consider how the current market affects the performance of the business or investment. 

After the analyst obtains the data s/he needs, s/he employs various techniques such as mathematical and financial models to come up with a business or investment’s expected earnings.

The expected earnings should be reasonable, meaning that the business or investment can confidently generate them for the upcoming period.

That said, even with all these considerations, analysts can still make mistakes that result in unexpected earnings.

Naturally, analysts would want to eliminate “unexpected” earnings as much as possible as it means that they make accurate forecasts.