Why Do I Have to Understand the Earnings concept?
Earnings are basically the net profits of a company’s operation over a period of time. It also includes a company’s net loss in a single transaction. Many terms for earnings are also used as EBIT or EBITDA. Generally speaking, Earnings refers to the income from operations less the expenses associated with it. The concept of Earnings is crucial in determining the future success of any business.
Earnings per share (EPS) is the most commonly used term for calculating earnings. It is calculated by dividing net Earnings (the earnings from operations less the expenses) by the Earnings per Common Share (EQC). The short form of EPS is calculated by dividing net Earnings by Earnings per Common Share and also deducting the cost of capitalization. The long form of EPS is calculated by dividing net Earnings by Earnings per Common Share and also deduct the cost of capitalization. There are other forms for EPS, and the one you choose should be determined by your purpose for calculating them.
One of the advantages of measuring earnings in terms of Earnings is that it is applicable not only to sales but also to costs of production. Cost of production, also known as cost of sales, is the cost of goods sold less allowances for depreciation. This excludes the value of inventory, which is primarily depreciated. Other items such as advertising and promotion are not depreciated. The cost-to-sale and cost-to-manufacture measures of earnings exclude the value of stock-based compensation because companies use stock options for employees to buy shares of stock or units in the company, and not for salary payments. Generally, analysts calculate Earnings as the difference between sales price and cost price or the gross profit.