What does it mean when a stock "beats earnings"?

Before every quarterly report, analysts who follow a company publish estimates of what it will earn, and those get averaged into a "consensus." When the company reports earnings per share above that consensus, it "beat." Below, it "missed." The gap is often tiny; a beat of two cents on $2.50 still counts.

The key thing is what the comparison is against. A beat is relative to expectations, not to last year. A company whose profits fell 20 percent from a year ago can still beat if analysts had expected a 25 percent fall. Conversely, a company that grew profits 30 percent can miss if the market wanted 35.

Companies know this and manage it. Guidance is routinely set a little low so that the eventual result can clear it, which is why roughly three quarters of S&P 500 companies "beat" in a typical quarter. A beat is the expected outcome; a miss is the news.

The same word applies to revenue, and the two together tell you more. Beating on earnings but missing on revenue often means the company cut costs rather than grew, which the market treats differently. Our guide on reading an earnings report walks through the full picture.