Accounting Terms You Need To Know
Earnings are basically the financial benefits of the performance of a company. It is a ratio of profits to the cost of capital. Generally, Earnings are also the current level on which corporate taxation is based. For a detailed analysis of the factors behind corporate operations many other technical terms are generally used as EBIT and EBITDA. There is also FOC that is first in second order and represents the first in first out measurement of earnings by an entity. In general, FOC represents the first in first out, second in second order.
The difference between gross and net income (the latter being the former) is an important determinant of whether or not the company is on the right track. Therefore, it is a very important metric. This is because one does not really expect to have earnings if the net income remains constant. If there is a substantial increase in the earnings per share but that does not translate to a corresponding increase in the bottom line then the EPS would show a decrease. It is therefore important for investors to know if the company is increasing its earnings (or perhaps decreasing it) primarily because of net profits and not just gross profits.
Another accounting term that is used extensively in earnings analysis is the retained earnings metrics. Basically, retained earnings refers to those amounts that would normally be paid out to the shareholders as dividends under the regular dividend policy. Under the regular dividend policy, the dividends are given out once a company has attained a specific target income (usually a profit). The target income could be calculated by taking the market value of the issued securities or alternatively it could be determined by looking at the return on equity over a given period of time. Under this method of calculating retained earnings, the shareholders are typically only entitled to a percentage of the annual retained earnings.