Earnings are basically the monetary benefits of the performance of a company. Basically, earnings is the cash flow that a company generates on its business operations. For an accounting analysis of certain aspects of company operations, other more technical terms such as EBIT and EBITDA are sometimes used.
Generally speaking, earnings per share (EPS) is the most basic and widely used method for calculating earnings. It is calculated by dividing sales price of the enterprise by the enterprise’s total assets. For example, if a company sells hundred thousand units of its product for $100, the earnings per unit would be $100 / total assets of $100. The EPS is calculated like this but with one difference – total assets usually have to be measured in millions of dollars instead of units.
Other financial measurements used by analysts, investors, and management in accounting are profit margin, gross profit, cost of goods sold, warranty reserve, current gross margin, dividend yield, return on equity, and market capitalization. To arrive at these financial measures, historical earnings performance is compared with the corporation’s latest performance. Analysts, investors, and management make use of estimates based on historical performance of the company. There are three main methods used to arrive at estimates for these financial measures: the historical earnings performance, the impact of interest and other payments on the value of the company’s stock, and the replacement of existing assets with new ones.