Understanding Earnings

Earnings are the financial benefits of the operation of a company. Earnings refers to the total revenue, less the cost of good sold, less the taxes, less the lease interest, less the retained earnings, less the expenses of the owner(s) and net income earned by the corporation after the deductions for Federal, State and Local taxes. Some more technical terms used for a more detailed analysis of the operations of corporate finances are EBITDA and EBITA. Ebitda is a synonym for EBIT.

One of the three major measures of Earnings, called the diluted earnings (EQ) is calculated as the earnings per share (EPS). The price per share (PPS) used in calculating EPS is not determined in accordance with the fair market value (FMV). Earnings are measured at the end of the reporting period in relation to the stock price. Other measures of Earnings that are frequently used are the average earnings ratio (AER), the ratio of sales to inventory, and the weighted average assets/liabilities (VAUL). The other two AER measures are cost of sales and cost of new business. The quarterly revenues and profits are also included in the measurement of earnings.

The third fundamental measurement of earnings is net income, which can be either gross or net income. Net income is the income obtained from the sale of securities by the corporation and includes dividends. It is calculated by adding gross profits to net profits. Components may be profit on sales, selling and administrative expenses, and property, plant and equipment turnover. Net income is usually determined using one of the following methods: net income attributable to owners, implied free cash flow, and equity method.