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Earnings

The amount of money that a company generates during a specific time period is called as ‘earnings’. This amount of money, to put it simply is the profits it has made in a certain amount of time which is usually defined as a quarter or a year.

Earnings: Simple to calculate or complex?

To elaborate this further, consider you have a company’s revenue that they have made from selling something. Now, from this revenue, you subtract the amount of money it took to produce whatever good or product that they made, which they sold, from which they got their revenue. Whatever money that you are left with in the end is going to be the company’s earnings. It is the money they made after selling something, and deducting all the costs that added up to make that something.

Although the explanation of earnings is simple, but let us just say that it is deceptively simple for there is a lot more that goes into calculating the earnings. However at the end of it you really are just measuring how much profit the company has made. Some people do get confused also because the wide array of synonyms that are often used for ‘earnings’ like ‘ net income’, ‘ bottom line’ etc without realizing that they all mean one and the same thing.

Investors and financial analysts use Earnings Per Share ratio to see and compare the earnings of different companies. It is pretty self explanatory; the easiest as well as the quickest way of finding out if a company is doing well is to have a look at its earnings and Earnings per Share ratio. To calculate EPS, you divide the earning left over for shareholders by the number of shares outstanding.

Another reason why earnings are considered so important is that they help drive stock prices. So the greater the earnings are, the stock prices would move up and the lower the earnings are, down the stock prices would move. This is why investors lay a lot of importance on earnings because they know that ultimately earnings are going to be the deciding factor of the stock prices.


Further Reading


Conservatism and the asymmetric timeliness of earnings.
elibrary.ru [PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …

Stock returns, aggregate earnings surprises, and behavioral financeStock returns, aggregate earnings surprises, and behavioral finance
www.sciencedirect.com [PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …

Does founding family control affect earnings management?Does founding family control affect earnings management?
www.tandfonline.com [PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …

Liquidity and the post-earnings-announcement driftLiquidity and the post-earnings-announcement drift
www.tandfonline.com [PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …

Audit quality, debt financing, and earnings management: Evidence from JordanAudit quality, debt financing, and earnings management: Evidence from Jordan
www.sciencedirect.com [PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …

Earnings management under German GAAP versus IFRSEarnings management under German GAAP versus IFRS
www.tandfonline.com [PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …

The relation between stock returns and earnings: A study of newly-public firms.The relation between stock returns and earnings: A study of newly-public firms.
elibrary.ru [PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …

Asset Impairments and Earnings Management <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-KJYJ200603003.htm' />Asset Impairments and Earnings Management [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-KJYJ200603003.htm'>PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …

Earnings management and securities litigation.Earnings management and securities litigation.
elibrary.ru [PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …

Earnings Management and Quality Of Independent Audit <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-KJYJ200401007.htm' />Earnings Management and Quality Of Independent Audit [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-KJYJ200401007.htm'>PDF]
… CONSERVATISM AND THE ASYMMETRIC TIMELINESS OF EARNINGS. BASU S … It is shown that the contemporaneous association between earnings and negative returns is two to five times as large as the contemporaneous association between earnings and positive returns …



Q&A About Earnings


What is an economic profit?

An economic profit is the difference between the revenue a commercial entity has received from its outputs and the opportunity costs of its inputs.

How does one calculate Earnings Per Share (EPS)?

To calculate EPS, you divide the earning left over for shareholders by the number of shares outstanding. Another reason why earnings are considered so important is that they help drive stock prices. So the greater the earnings are, the stock prices would move up and the lower the earnings are, down the stock price will go.

How do economists define normal profits?

Economists define normal profits as what is necessary to cover both explicit and implicit costs of a firm.

What does an accounting profit not consider?

An accounting profit does not take into account implicit costs, which include opportunity costs.

Why do investors and financial analysts use Earnings Per Share ratio?

Investors and financial analysts use Earnings Per Share ratio to see and compare different companies' earnings because it's easy to understand how much profit each company makes from its sales revenue. It also helps them determine if a company's doing well or not based on their past performance record.

What determines whether stocks will rise or fall?

Stock prices tend to rise when companies report higher than expected profits while they tend to fall when companies report lower than expected profits.

Why do economists often view economic profits in conjunction with normal profits?

Normal profits are what are necessary to cover both explicit and implicit costs of a firm.

What type of cost does an accounting profit only relate to?

An accounting profit only relates to explicit costs that appear on a firm's financial statements.

What is the definition of earnings?

The amount of money that a company generates during a specific time period is called as earnings. This amount of money, to put it simply is the profits it has made in a certain amount of time which is usually defined as a quarter or a year.

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