Earnings

In simple terms, Earnings means – Profits

In business, however, there are other terms for profit. “Net income” and “Bottom Line” are commonly used. Just like the term “net pay” or “or “net salary” or “take-home pay”, earnings are like the “take-home pay” for a business. It is the money the company has left after paying for the costs to do the business such as salary or wages, raw material cost, taxes and interest on loans, etc. Earnings are the topmost measure of the growth of a company. Analysts look for companies that have growing earnings. It is the reason why stock investors look forward to the quarterly “earnings results” reports.

Revenues

Revenue is the total money a company will get by selling goods and services before the expenses are deducted. In an income statement, the revenues or sales will be shown on the left-hand side of the statement if it is in a Horizontal format or on the top of the statement if it is in portrait format. When all the expenses are deducted from revenues, the figure we get is called earnings. While revenue growth is important and is a fact that earning or profit has to come this, it does not indicate whether the company is making any profit.

Forms of Earnings

We know that earnings are a company’s profit but it is important to know what comprises this number. We also find terms such as Earnings Before Taxes – EBT; Earnings Before Interest and Taxes – EBIT; Earnings Before Depreciation, Interest, and Taxes – EBDIT; Earnings Before Interest, Taxes, Depreciation, and Amortization – EBDITA and Earnings after Taxes – EAT.

Earnings per Share – EPS

Earnings per share or EPS is the portion of part of the profit which each individual share of the company has earned. It is a good indicator to help gauge the profitability of a company and is an important ratio to consider while evaluating a stock.

How is EPS calculated?

The formula for calculating Earnings per Share or EPS is Net income – dividends on preferred stock / Average Outstanding Shares (Net income – Dividends on Preferred

The reason for using the term “average outstanding shares” is because EPS is reported over a particular period. The number of outstanding shares is likely to fluctuate during the period, and by taking the average number, it a more precise result.

Why is EPS important?

EPS is considered to be the single most important ratio by a majority of investors evaluating stocks. But, certain aspects of EPS could be misleading while we compare two different companies. To give an example, a particular company may have used double the capital to generate the same profit as another company, which shows that it is not efficient as the other company in utilizing capital. As these numbers will not be reflected in the EPS, it is important to keep in mind that EPS alone does not give the full picture.

POINTS TO NOTE

While analyzing the EPS of a company, the following points must be kept in mind:

· One should compare earnings growth with previous years/quarters. A consistent increase in EPS is a good indicator of real growth.

· Current quarterly earnings per share must be up by at least 10-20%.

· Annual earnings per share should show decent growth for the previous five years.