Earnings – An Overview

Earnings are the economic benefits of the operations of a company. Earnings refers to the gross profit a company makes after all expenses have been deducted. Many other more technical terms are also used such as EBIT and EBITDA for an analysis of the financial aspects of company operations. These terms can be a bit confusing especially for first time investors who sometimes think of profits and dividends when they hear the term “earnings”.

The basic definition of earnings is that it is the income that a firm makes from the value of its assets and liabilities less its net worth. In the financial market’s earnings can refer to a number of things. It can be gross sales, retained earnings, net income, and gross margin. Some firms calculate their earnings by calculating the difference between total revenues less total expenses. Other firms use a different measure called price-to-earnings ratio, which compares the stock price to the cost of the same stock per share. In the past, the most commonly used method of measuring earnings was the price-to-book ratio, which was the difference between net tangible assets / tangible equity and book value of the firm’s outstanding commercial loans.

There are several financial statements which contain information about earnings such as the income statement, balance sheet, and statement of cash flows. All these reports are required to be prepared in accordance with generally accepted accounting principles (GAAP). A company’s income statement, balance sheet, and cash flow analysis are three major factors which make up an annual report about earnings. The accuracy of these reports depends largely on the data sources used and on the skills of the analysts who prepare them.