What Are the Basics of Earnings?

Earnings are basically the financial net benefits of the operation of a company. Earnings refers to the amount paid by the corporation in behalf of its stockholders as dividend. For an accounting of certain economic aspects of corporate activities, more definite terms are generally used as EBIT and EBITDA instead of straight earnings.


The basic earnings concept has been around since Adam Smith’s time and it is the source of much of the economic reasoning we use today. The key to understanding earnings is looking at them in the context of other business measures. Earnings represent the value provided to the shareholders by the corporation. Other measures of earnings are net income, gross profit, and net income per share (EPS). The track record of profits is important because it shows what the company has been doing over a period of time and it gives investors an idea of what they can expect in the current period.

The definition of earnings refers to the revenue product of a firm that is usually presented as a single value, and in most cases it is calculated as a ratio. The earnings per share, or EPC, is a measure of earnings that is calculated as a percent of revenues. The first part of the equation is the price/earnings ratio, or P/E, which is a measure of how effectively the firm sells its products to customers. The second part, the earnings before expenses are measured, or EFC, is a measure of the efficiency with which earnings are earned by the company. It is calculated as a percentage of the profits earned, T/E, over a period of one year.