Earnings and Profits – An Essential Consideration When Setting Corporate Revenue and Earnings
Earnings are the residual profits of a company’s operation. Earnings per share (EPS) is the underlying value on which corporate taxation is based. Several other technical terms are also used such as EBIT and EBITDA for an overview of certain aspects of internal operations. Generally speaking, Earnings refers to the profit made by a company after tax, less any expenses paid or capital received. It also includes the effect of dividends or interest and other surcharges paid to the shareholders.
The purpose of Earnings and profits is to show the actual net income (after tax) from a company’s business activities. This represents the bottom line income of the corporation. It is usually quoted on a quarterly basis and compares the current period with the last year. If the profit margin is lower than the revenues, then the Earnings per Share will be lower than revenues too.
In order to obtain the Earnings per Share (EBT) figure, companies are required to provide financial documents that allow an analyst to make an apples-to-apples comparison of the current period to the prior year. One of the major problems that face companies in today’s marketplace is providing enough information to allow an analyst to make a reliable and fair assessment of company earnings. Companies rely heavily on internal estimates and these can be volatile because of accounting considerations. The use of estimates makes it difficult for investors to make accurate equity or debt portfolio decisions.