Calculating Earnings


Calculating Earnings

Earnings are basically the net profits of a particular company’s operation over a given period of time. Earnings per Share (EPS) is the amount on which tax is payable by a company. Several other more specific terms such as EBIT and EBITDA are commonly used as well for an analysis of certain aspects of company operations.

Earnings excluding profit and loss and income taxes are calculated by adding the gross receipts less the total revenue less the expenses. There are several common accounting journals in the world today which calculate these figures for a company. The most widely used, but flawed method is to divide earnings by the gross receipts less the revenues. This in not only highly misleading but it is also very unwise because it tends to create the illusion that revenue is growing when it is actually decreasing.

The earnings per share (EPS) ratio measures the percentage of earnings that is earned by the overall company in relation to the total revenues generated over time. Another widely used and vastly misused ratio is the diluted weighted average weekly earnings measure, or DVAE. The DVAE is calculated by dividing the Earnings per Share (EPS) by the Company’s Net Earnings (NAV). This way if one of the largest dividends is paid out the weighted average will appear as though the company has actually been paying out more money to shareholders than they are making in profits. While there are many reasons why a company may choose to use one of these different measures there is one reason that should always be utilized and that is that it truly provides a true and accurate picture of a company’s Earnings. Other than accounting methods, this type of analysis can provide investors with a true picture of how a company’s Earnings are being used.