Glossary
Earnings
A company's profit for a period, the bottom line of the income statement; usually used interchangeably with net income.
Earnings are what a company has left after paying all of its costs for a period: what it sells, minus the cost of making it, operating expenses, interest and taxes. The figure sits at the bottom of the Income statement, which is why it is called the bottom line, and it is reported as Net income. Over the long run, a company's stock price tends to follow its earnings, so this is the number markets watch most.
From revenue to earnings
A simplified income statement shows the path:
| Line | $ millions |
|---|---|
| Revenue | 1,000 |
| Cost of goods sold | −600 |
| Gross profit | 400 |
| Operating expenses | −250 |
| Operating income (EBIT) | 150 |
| Interest expense | −20 |
| Pretax income | 130 |
| Income tax (21%) | −27 |
| Net income (earnings) | 103 |
The many versions of "earnings"
When people say earnings, they may mean several different figures:
- GAAP net income, the official number under US accounting rules.
- Adjusted or Non-GAAP earnings earnings, which strip out items management considers one-off, such as restructuring costs or stock-based pay.
- Earnings Per Share (EPS), earnings divided by shares, the figure compared with the Consensus Estimate.
- Operating measures such as EBIT and EBITDA.
"Earnings" also refers to the quarterly report itself, as in "the company reports earnings on Thursday."
What to watch for
Earnings are an accounting result, not cash. Revenue can be booked before customers pay, and large non-cash charges or gains can swing the total. Comparing earnings with Operating cash flow over several years shows how much of the profit turned into real money. One-time gains, such as selling a division, can make a quarter look far better than the underlying business.