Earnings – A Basic Understanding

Earnings are the financial benefits of the operation of a company. Earnings per share, Earnings per action, and Earnings per transaction are some of the terms commonly used for accounting and monetary measurement of earnings. Earnings is the measure on which corporate taxation is based. There are other more specialized terms for the measurement of earnings such as EBIT, EBITDA, gross profit, and gross margin. The accounting principles are primarily used to record the income taxes and to determine the liability of the company in future taxation.


The major drivers of earnings growth are supply chain, marketing, and selling activities. These drivers affect the price-to-earnings ratio (PE Ratio), and therefore indirectly affect the shareholders’ equity and ownership interest in the company. The increase in the company share price (PSA) also raises the market price of the stock and the earnings per share (EPS) and the gross margin for the company. The EPS is the gross profit / total assets / total expense divided by the net income earned by the company. Management uses these earnings reports to set the organization’s objectives and future plans. This form of measurement is also used to set incentive pay programs for employees.

The price-to-earnings ratio is determined by calculating the average price of company’s common stock or preferred stock divided by the enterprise value of the business (EVP). The greater the entrepreneur v/s shareholders’ equity, the better the P/E ratio will be. Price-to-earnings ratios of the most recent years have been shown to be negatively correlated with the net income of the company. The correlation is because companies often have earnings that are higher than book values but lower than their net worth.