Investing for Beginners , investing

Earnings are calculated gains of the company and should represent the profit of that business. There are several types of earnings:

• Retained earnings are equal to net profit less dividends.
• Net earnings and it is the same as net profit, net income, or bottom line.
• EBT (earnings before taxes) is equal to net earnings plus taxes.
• EBIT (earnings before interest and taxes) is equal to earnings before taxes plus financial expenses and less financial income.
• EBITDA (earnings before interest, taxes, depreciation and amortization) is equal to EBIT plus depreciation and amortization.

Usually if one type of earnings increases others also move up, but in some cases this rule may not work. To check company’s earnings the best way is to measure earnings of all types and track how they are changing over time. Earnings are crucial for every company, but many other financial ratios are important too, and earnings as a standalone ratio may be misleading in some cases. According to accounting, all income comes in to the calculation of net earnings (all revenue and gains minus all expenses and losses), however, if you want to get true picture of the company, you should eliminate all the effects of one-time and non-continuing income and expenses.

The higher the earnings are the more satisfied shareholders of the company should be because higher earnings means higher return on equity (ROE) and higher return on assets (ROA) as well as higher return on their investment because the value of company’s stocks mostly depends on company’s earnings (including EBIT and EBITDA). 

For investors earnings are also important because they are used to get EPS (earnings per share) which is needed to calculate P/E ratio. The higher are earnings the lower will be P/E ratio and the more attractive company will be as investment. If earnings are increasing more than expected, then stock price also should increase in the stock market. 

Naturally, the bigger the company is the more earnings should be earned. The best way to measure if company earnings are sufficient is to calculate profit margin and compare it to businesses of the same industry segment. Earnings of the company can be found in its financial statements.