What Are Earnings?

Earnings are basically the net profits of a company’s operation. Earnings is the monetary value on which corporate taxation is based. For an overview of different aspects of corporate accounting, more specific terms such as EBIT and EBITDA are also used. A company’s Earnings per Share (EPS) is basically the gross profit / loss per share in a particular year. A company’s Earnings ratio is the annual earnings per share a company has issued. The company issuing the stock usually sets the cap on the price it will pay for a particular share of stock.

A company’s net profitability is the difference between its gross profit and its net debt or equity as defined by shareholders’ equity. Generally speaking, companies with higher profits have lower debts and equity as compared to companies with low profits. Net profits are calculated by deducting the gross interest and other expenses from net revenues and then dividing it by net assets or equity. The better a company’s net profitability, the easier it will be to meet its expenses and other payments.

An important area of earnings analysis is the reconciliation of net income to the financial statements. Most analysts recommend that the company add some net income, if the net income presented to investors does not include this income. The 10-q is the document that investors should look at when a company’s earnings are being prepared. Other analysts prefer to use the 10-q when preparing their own financial statements but some newer investors prefer to prepare their own individual 10-q.