Earnings

  

In our capitalist, market-driven system, the basic goal of any company is to make money for shareholders. The term for that money? Earnings.

The earnings figure represents the amount of money that's left from revenues once all the expenses are paid...the legendary bottom line, adjusted for accounting charges like depreciation, amortization, and other non-cash charges.

Or, said another way, the special thing about "earnings" versus just "cash profits" is that earnings takes into account the laws of accounting, which sometimes matter a lot when calculating a final number. Like...that $100 million factory really got a lot worse this year with wear and tear. It really should have $10 million in depreciation attached to the earnings number, becuase if it doesn't, one day the company will wake up and have no factory to run its business. Earnings is basically how companies and businesses are judged...or rather, value-assessed...especially public companies trading shares on the open market.

(Note on term usage: a company's results are often referred to generally as "earnings," as in "Apple is reporting its earnings tonight." More specifically, "earnings" means the amount of profit, as opposed to a loss. So you can end up with a sentence like "In today's earnings announcement, Whirlpool revealed a quarterly loss.")

Public companies will often report a few earnings figures. They will report a total figure, often known as "net income" or "net earnings" (or "net loss," if things have been less than rosey).

Firms will also include a figure for earnings per share. This stat takes the net income number and divides it by the number of outstanding shares. The EPS number takes the earnings amount to the shareholder level.

The size of the EPS will depend both on the size of the net income figure and on the number of shares outstanding. So when describing earnings, you might say something like "GE reported earnings of $3.2 billion, or $0.32 per share." The "per share" part of the EPS figure also leads to a situation where net earnings can move up, while EPS moves down (or vice versa). This only happens under rare conditions, usually when the move in net income is fairly slight and there's simultaneously a large change in the number of outstanding shares.

Related or Semi-related Video

Finance: What is Earnings Quality?50 Views

00:00

Finance allah shmoop What is earnings quality Well it's just

00:07

math right Whatever Dot com just produced a dollar thirty

00:10

two in earnings One hundred thirty two cents of wall

00:13

street Love and profit How can there be a quality

00:16

to that number The number is a number right Well

00:19

yes but rather there are different qualities of earnings What

00:23

if we told you that one hundred percent of whatever

00:25

dot coms earnings came from Adsit sold tto forty thousand

00:29

different buyers because its website was just that popular All

00:33

of the growth came intrinsically meaning that users just loved

00:37

using the site and nothing meaningful changed on their balance

00:40

sheet or wall street Fancy engineers doing creative clever things

00:44

with the selling of money Other than that the cash

00:47

account went up because dead profits and they kept him

00:50

okay Those air very high quality earnings Really sure about

00:54

that C we threw a curveball in there We do

00:57

that all the time All right Well what if we

00:58

told you that seventy percent of their ad sales came

01:01

from a subsidiary in china and were all collected in

01:05

our m b the chinese currency and that in this

01:08

quarter well that the chinese currency appreciated thirty eight percent

01:12

relative to the dollar Well essentially all of their big

01:16

growth The big growth that we thought was such high

01:18

quality earnings came because the chinese currency did well not

01:22

because their business did all that well so wait Had

01:26

the chinese currency just been flat the company wouldn't have

01:29

earned anything close to a dollar thirty to seventy percent

01:33

of the sales and almost forty percent of currency gain

01:37

there Well it means that the company happened to have

01:40

a lot of sails in a country with a fast

01:42

appreciating currency It wasn't necessarily a direct reflection that the

01:46

company was doing so well and had such high quality

01:49

earnings Yeah it's great that they were in a hot

01:51

market and highly appreciating currency but if the currency hadn't

01:54

gone up so much relative to the u s dollar

01:56

in which they report their earnings toe wall street while

01:59

the real urn things end of the company would have

02:01

been more like a dollar maybe less so that it

02:04

be low quality earnings What about high quality earnings Well

02:09

really simply you said you'd sell three hundred tractors this

02:13

quarter the street thought you'd sell three hundred ten You

02:16

actually sold three hundred twenty you said margins would be

02:19

twenty percent The street thought they'd be twenty two percent

02:22

and they actually were twenty five percent You said you

02:25

generate twenty million dollars in cash the street thought you

02:28

generate twenty two and you actually did generate twenty five

02:32

million dollars in cash High quality financial results Simple You

02:36

just did your core business Selling tractors well Quality earnings 00:02:41.233 --> [endTime] quality tractors

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