What it means
Securities analysts at banks and brokers publish forecasts of what each listed company will earn. I/B/E/S gathers those forecasts into one place, standardises them and updates them as analysts revise their views.
The service began in the 1970s and is now run by a major financial data provider. The key output is the consensus estimate, usually the average of the analysts' forecasts for a given period.
The database also records the highest and lowest estimates, the number of analysts and changes over time. Researchers use it to study how accurate analysts are and how markets react to news.
When a company reports, the result is compared with the consensus. A figure above consensus is a positive surprise and a figure below it is a negative surprise, and share prices often move sharply on the difference rather than on the result itself.
This is why a company can report record profit and see its shares fall. Companies pay close attention to I/B/E/S for several reasons.
Investor relations teams monitor how many analysts cover the stock and whether estimates are rising or falling. Finance teams may use the consensus when setting guidance, which is the range of results management tells the market to expect.
There are limits. Estimates can be biased towards optimism, analysts often herd around similar numbers, and definitions of earnings can differ between brokers.
Users should check whether the figures are adjusted for one-off items and which basis the analysts use. Timing matters too.
Estimates are revised as new information arrives, so the consensus a week before results can differ from the consensus a month earlier. Analysts who revise late often do so after management gives hints, which means the final numbers tend to cluster around guidance.
In practice
Real-world examples.
Example
A fund manager compares a retailer's quarterly earnings per share of $0.55 with the I/B/E/S consensus of $0.50. She sees a 10% positive surprise and considers adding to her holding. Before acting, she checks whether the beat came from sales growth or from a one-off tax gain.
Example
An investor relations director reviews the spread of estimates before results day and finds that the highest forecast is 30% above the lowest. She briefs the chief executive that the market is divided about next year's outlook. The team decides to prepare extra detail on the assumptions behind next year's plan.
Example
An academic researcher uses decades of forecasts to test whether analysts are too optimistic before share offerings. The paper compares the average error before and after a company raises capital. The findings help investors judge how far to trust forecasts around share offerings.
Formula
Calculation
Consensus estimate = Sum of analysts' estimates / Number of analysts
Earnings surprise (%) = (Actual earnings per share - Consensus) / Consensus x 100
Suppose four analysts forecast earnings per share (EPS) of $1.90, $2.00, $2.00 and $2.10. The consensus is ($1.90 + $2.00 + $2.00 + $2.10) / 4 = $8.00 / 4 = $2.00. If the company reports EPS of $2.20, the surprise is ($2.20 - $2.00) / $2.00 = 0.10, or 10%. If it had reported $1.80, the surprise would be ($1.80 - $2.00) / $2.00 = -0.10, or -10%.Case study
Seen in the real world.
Kestrel Instruments is an illustrative, fictional listed company whose chief financial officer, Amara, noticed that analysts' forecasts for the coming quarter had drifted up to $1.20 per share, while the internal budget showed only $1.05.
She asked the investor relations team to pull the consensus and the range of estimates from the database. The team also checked how many analysts had updated their numbers in the past 30 days. The range was narrow, which suggested analysts were copying one another after an upbeat conference presentation. The company decided to issue a short statement to guide expectations to between $1.00 and $1.10.
In this illustrative story the company reported $1.07, in line with its revised guidance. Because the market had already adjusted, the share price barely moved, whereas a miss against the earlier $1.20 would have caused a sharp fall. The lesson is that managing expectations matters as much as managing results.
Watch out
Common mistakes.
- Treating the consensus as a fact about the future, when it is only an average of opinions that may be wrong.
- Comparing figures on different bases, such as adjusted profit against reported profit, which produces false surprises.
- Assuming the share price will rise whenever a company beats the consensus, when the market may have expected an even better result.
Questions
People also ask.
What does I/B/E/S stand for?
It stands for Institutional Brokers' Estimate System, a database of analyst earnings forecasts.
Who uses I/B/E/S?
Investors, analysts, investor relations teams and academic researchers use it to track expectations and study forecast accuracy.
What is an earnings surprise?
It is the difference between actual results and the consensus forecast, often shown as a percentage.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related