Earnings are the financial benefits of the performance of a company. They represent the profits made by the company out of its assets and liabilities. Earnings reflects the income from the sales of products and services that are produced by the firm and its accounts receivable and inventory. There are some other terms used in earnings accounting, as EBITDA and EBIT.
Earnings per share (EPS) and net income (NE) are the two commonly quoted measures of earnings. The difference between EPS and net income is reflected in the shareholder’s equity or the difference between net worth and the shareholders equity. Some investors may not be happy with these measurements because they do not allow enough room for the growth of the enterprise. The purpose of earnings is to provide sufficient funds to support the operations of the enterprise and meet its obligations to its stock holders.
It should be kept in mind that when investors see the company’s earnings they consider not just the gross profit but also take into account the gross margin or the difference between the selling price and the cost of sale. Other factors that affect the overall profitability of the company include the cost of good sold and the gross royalty basis and the foreign currency exchange rates. The gross profit and the gross royalty basis are not reported in the earnings reports because they are considered as advertising expenses. However, the effect of these items on the stock price is not immediately evident because they have a long term effect. Hence, they are not included in the statement of earnings.