Major Components of Earnings

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Earnings are basically the financial advantage of the operation of a company. These include net profit, gross profit, and net loss. The gross profit is the value, less selling and administrative expenses of the total business entity during a period of time. Net profit is the total revenue of the business entity less total cost of good sold, paid in capital, and retained earnings. Various other terms for the calculation of earnings are EBIT and EBITDA. EBITDA is basically an accounting term for the difference between net profits.


Other important earnings measures are income statement, profit and loss statement, and balance sheet. Among these, the income statement gives details about the earnings generated by the core business units apart from the assets of the organization. The profit and loss statement shows the activity for each particular fiscal period; the balance sheet provides financial information of the organization, its assets and liabilities, and also includes details about the stockholders’ equity.

Earnings momentum is the result of operating efficiency and growth. It is expressed as net income per unit increased or decreased from a pre-determined level. The relative valuation is done on the basis of current market prices. This may be expressed as current price divided by current sales price. In order to get an accurate picture of earnings, one has to determine the factors like profitability, debt to equity, and market size.

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