Over the past few years running Estimize I've had countless people ask me to write a post on how to make earnings estimates. Before I get into that, let me very briefly explain why this is even important to most traders and investors with a time frame greater than a few days, or anyone holding or trading into and out of earnings.
1. The price of any asset is a function of supply and demand, and those two things are based on sentiment, not pure math. Why do some stocks in the same industry trade for 30 times earnings while others trade for 10 times? Sentiment. A large piece of that sentiment is often the future outlook for the fundamentals of the company (earnings, revenue, margins, the growth of various lines of the business). Estimates on these data points are extremely important, they are one half of the puzzle
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