A fluctuating pattern of a company’s net income or earnings per share (EPS) during a given period of time. Historical earnings variability is generally considered a negative indicator because it makes future earnings per share and dividends less certain. Consequently, a history of earnings variability may, sometimes, be seen as a drag on a company’s stock with a lower-than-average price-earnings ratio (P/E ratio). Nevertheless, rational investors focus on return and risk in terms of present and future cash flows, not earnings (or historical cash flows). Most analysts view earnings variability as having limited or no impact on market value and shareholder returns.
In calculation, earnings variability is typically measured by a tool known as the coefficient of variation for the preceding year’s earnings.
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