Corporate earnings are the measure of a company’s financial health and future prospects. Investors closely monitor earnings reports, and companies’ stock prices typically rise when their earnings exceed expectations.

While a company’s earnings may seem simple, the way that the numbers are calculated can be complicated and confusing. This is especially true in public markets, where accounting rules can allow a loss to become a profit simply by changing what is included or excluded from the equation. This distortion, called “earnings engineering,” is a key factor that impacts long-term investing.

Earnings are measured as a company’s revenue minus its cost of goods sold (COGS), operating expenses, and income taxes. Often, companies will also report what is known as diluted earnings per share, which takes into account the number of additional shares outstanding due to issuances and conversions during the reporting period.

The number of shares outstanding can impact a company’s profitability because each additional share entitles the owner to a fraction of a company’s profits. In addition to calculating EPS, companies will often break out the underlying components of a company’s earnings by segment to offer insight into performance and trends in each business area.

While the overall growth of corporate earnings has been solid this year, the pace has slowed in recent quarters as companies grapple with rising tariffs and a lack of visibility into future costs. As earnings season kicks into high gear, investors will be closely watching for signs that the global economy and corporate margins are stabilizing.