Accounting Practices For Earnings
Earnings refers to the net profits of a business. It includes income from the sale of goods and services, rental revenues, interest and other disbursements. Earnings per trade (EAT) is the income from transaction activity between a firm and its customers, and represents the value of the customer’s purchases at the wholesale price and the retail price less cost of service.
Earnings ratio or EBIT is the ratio of total earnings to total assets. The other major financial measures of the company are price-to-earnings (PE) and price-to-books (PB). Price-to-earnings (PE), which is commonly used as a measure of earnings volatility, reflects the expected change in stock price for a given period. It is calculated by dividing the annual gross profit of the business by the current market price of the company’s stock and is the best indicator of future profit trends.
Price-to-books (PB) is an accounting practice that uses patterns of trading price changes to analyze the underlying value of the company. Generally, PB’s are made based on accounting information usually released in the first quarter of a company’s year. The information most commonly used in making PB’s is the average order value of stocks sold during the last three months. However, analysts make their own estimates of the stock price and use them for calculating average price-to-books ratios for the last two years or more. In addition, analysts use forecasted dividends and share price in their estimates.