What Are Earnings?
Earnings are basically the financial results of a company. Earnings per share (EPS) is the measure of earnings per stock unit earned by the company. There are many other terms for earnings per share including EBIT, gross profit, book value and net worth. The income statement, however, provides a summary of these financial measures for one company in particular, the company in which the owner of the firm, i.e., the corporation is involved.
For a more detailed accounting analysis of the nature of the firm, various other terms are sometimes used as EBIT, gross profit, EBITDA, and net income. Most financial ratios measured by the earnings per share can be derived from the gross profit or book value of the firm as it represents today. The net income refers to the value of the corporation at the end of the reporting period less the current value of the firm.
The corporation may use either or both measures of earnings in order to calculate the performance and liquidity of its equity holders, as well as to meet creditors’ claims on the corporation. In order to have a fair picture of the company, the use of one or more measures of earnings is necessary. Many corporations use earnings surprises as their way of measuring the health and growth of the firm. The method of measurement can vary depending on whether the firm is publicly held or is a private company. Some companies use one method of measurement while some use both.