Arun and Vikram were sipping chai at their favourite tea stall. Their conversation veered towards the markets.

Arun: Stock markets are just crazy, Vikram. 

Vikram: Oh! Looks like someone burnt their fingers. 

Arun:  Wipro reported reasonable profits in its latest quarterly result. But the next day that stock opened 5 per cent down. Wonder what made the markets give a thumbs down? 

Vikram: Ok, so can you tell me if Wipro beat the consensus estimates? 

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Arun: What is that and why is someone’s estimate relevant? I have heard a lot about this confounding term on TV, but never really understood what it was. 

Vikram: Consensus estimate is a forecast of a company’s earnings based on the combined estimates of all the equity analysts covering it. It is essentially the average of estimates. 

Arun: Ok, but how is it relevant for markets? 

Vikram:  Consensus estimates are used to measure or benchmark the results declared by a company. The estimates of professional analysts are averaged and a single number becomes the consensus estimate. This estimate can be of sales, profit, EBITDA, EPS, NIM, etc. This is used as a yardstick by the markets to assess if the company’s performance was at par. If the consensus estimates are met or exceeded, it is considered positive while not meeting these estimates is sometimes taken negatively by the market. 

Arun: But how do these analysts come up with their own estimates? 

Vikram: Analysts try to estimate what a company is doing now and what might be its numbers in the future. Analysts use different tools and techniques such as models, valuations, projections, seasonality, market sentiments. They consider subjective inputs such as the condition in the sector and industry, company’s initiatives, etc. 

Arun: But where do we find these consensus estimates? 

Vikram: These estimates are made available in portals such as Bloomberg and investing.com. Yahoo Finance also has estimates but mostly for international stocks. 

Arun: How else can consensus estimates be used? 

Vikram: Consensus estimates can be used by investors to understand the prospects of the company before picking the stock. 

Arun: So, now I understand why Wipro’s stock was beaten down. Thank you for explaining this. 

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