What is Earnings Volatility? Why is it Important?
Volatility is an important concept that can help investors predict the price of a particular stock. Earning Volatility can give investors major insights about the price of a stock in the future and they can make their decision about buying the stock based on that information.
Let’s take a closer look at Earnings Volatility and how it can help guide investors towards making smart stock investment decisions.
What is Earnings Volatility?
Earnings Volatility is based on the stats for a particular stock. It is a concept that that determines the risk associated with the purchase of a stock and enables the investors to get an idea about the value that a stock is going to be priced at in the future.
Volatility is the risk related to the purchase of stock because of its changing value. If the volatility for a stock is high, there would be a greater risk associated with its purchase because you never know when the price is going to fall and how low it is going to be for a stock.
Importance of Earnings Volatility
The most important reason why earning volatility is such a crucial factor of financial analysis is because it is directly associated with the Net Earnings of a company. Based on the amount of money that the company has made; the investors can figure out the performance of a stock and the profit probability that it carries for them in the future.
Here are some of the reasons why Earnings Volatility is Important
It Affects Cost of Capital
Earnings Volatility has a huge impact on the Cost of Capital for a company. The earnings of a company are what keep the capital for a company in surplus. With higher volatility, the cost of capital increases because the company has to go to external sources of funding.
It Helps Predict Earnings for the Future
When Earnings Volatility is plugged into various financial forecasting models, it can give a close to accurate estimation about the future earnings for a company. If the earnings for a company are subjected to volatility to a low degree, then that would mean higher predictability for earnings and vice versa.
It Affects Share Price Performance
The share price performance of a company is affected a lot by the earnings volatility. If the earnings are highly volatile, the stock price carries a lot of risk with it which affects the investor’s stock purchasing decision. Although the effect can get dissipated in some cases, Earnings Volatility is still a strong indicator for the performance of stock.
Inconsistent Earnings Imply Higher Risk
Inconsistent and highly volatile earnings imply higher risk which stops the investors from buying the stock for a particular company. The goal of a company should be to keep the earnings volatility values as low as possible if they want their stocks to do well in the market.
Earnings Volatility is an important factor that predicts the earnings as well as the performance of the stock of a company. By paying attention to and minimizing this factor, companies can attract greater business in terms of their stock purchase.
If you play too many earnings, you may end up like these two cats... screaming when the report comes out due to the increase in volatility ha..ha...!