Understanding Earnings

Earnings are basically the net profits of the operation of a company. Earnings per share (EPS) is the basic figure on which corporate taxation is based. Generally, several other more technical terms are also used in the field of accounting, such as EBIT and EBITDA to mean earnings before tax and after tax. There are different methods to measure the profits of a company.

One method is through gross profit percentage, another is through gross profit margin, and the third method is net income, that is, income available minus total expenses. The first and third of these methods, gross profit percentage and net income, respectively, are considered in international business. These are very important for American businesses, as they are primarily based upon the value of the equity of stock and therefore, the profits are directly tied to the value of the stocks. Therefore, it is imperative for corporations to understand what these measurements are so that they can perform effectively in their operations.

To calculate these, companies use one of two different methods: one uses gross profit and the second uses net income. When using these in accounting, it is not only the gross earnings per share or earnings per unit that is calculated, but also other things such as the retained earnings, the reinvestment activities, the financing activities, and other factors. Because it requires a thorough understanding of how the operations take place, and how they affect the bottom line, it is imperative to have a good idea of the profitability of the corporation. Understanding how companies are measured for profitability will give managers the information they need to keep the shareholders happy by meeting their expectations, while at the same time providing the necessary guidance to ensure the operation remains financially sound.