A Guide to Understanding Earnings

Earnings are basically the net profits of a company. Earnings per share (EPS) is the number on which corporate taxation is based. For a detailed analysis of various facets of corporate operations many other more technical terms are also used as EBIT, EPSI and ESS. The profit figures come from the gross profits of the enterprise divided by the total assets, current liabilities and intangibles. These are then translated into the commonly known measures of earnings such as gross profit, diluted gross profit, net income, gross loss per share (Loss) and net income per share (NPP).

Net income per share (EPS) is a more complex measure than gross profits because it takes into account all costs and expenses and other relevant factors to calculate it. It is calculated by deducting expenses from revenue so that the net income can be calculated. The word ‘net’ in ‘net income’ should not be confused with ‘net worth’ which is simply the value of the enterprise less the debts of the enterprise. Thus ‘earnings’ and ‘profit’ are not the same thing as ‘income’.

Many companies prefer to report their earnings as a ‘Wage Cost’ and their profit as a ‘Net Profit’. They consider earnings as the cost of doing business and profit as the value of doing business. Unfortunately, a company cannot sell goods at its book value without costing it something. Thus an earnings figure should be treated as an average pay for workers minus the cost of goods sold. Earnings per share (EPS) and Living Wage are different measures of earnings because they differ by country.