An Explanation of Earnings

Earnings are basically the net profits of the operating profit of a company. Earnings also refers to the gross amount on which corporate taxation is based. There are many more technical terms used as EBIT and EBITDA for a detailed analysis of certain aspects of company operations. To simplify further the two terms mean the income from the sale of assets, capital goods and other items and services sold or purchased by the company and the earnings from its operation including interest, rent and other disbursements. The company derives its income from its operations.

Net profit and diluted EPS both refer to the net income or the gross profit less the diluted EPS. The term diluted EPS is usually used when there is decline in the net income or net profit after certain fees and depreciation have been deducted. On the other hand net income refers to the revenue actual plus the cost of goods sold less certain charges such as tax and other payments.

Earnings surprises may be due to one of the following sources: The quality of the operating income, turnover, seasonality, the penetration of customers, the timing of the product release, and extent of discounting. Therefore, it is always wise to make accurate estimation of earnings. This method of calculation is widely used in corporate finance. A good way to do this is to use the non-converting factor (NAF) method where a company’s net income from operations is not adjusted for the effect of one or more special items.