What Are Earnings?

Earnings are basically the net profits of a business. Earnings per share (EPS) is the total profit that a company makes divided between its equity holders. Many more technical terms are also used as EBIT and EBITDA for a detailed analysis of the operations of a certain company. The Earnings per Share (EPS) is a key performance indicator in many business transactions and analysis.

It should be noted that some companies may report their earnings in two different ways – the “current” earnings and the “pro forma” earnings. The former refers to reported results only and can be calculated by averaging the operating revenue per quarter with the average selling and administrative expenses per quarter. The latter would mean a company must report its full year results and includes all the relevant financial measures of the company. One of the most common measures of earnings made by analysts is the price-to-earnings (PE) ratio, which compares the total revenues of the company to its average selling price per share.

There are different companies with different methodologies for calculating the Earnings per Share or EPS. Some of the common methods used include the average over the period (accumulated over the years) of earnings and the actual earnings per share in a year. Other analysts calculate the Earnings ratio (EQ) – the ratio of sales to earnings per share, using data from the current and earlier periods. While others prefer to take the gross margin in gross sales, taking into account the cost of goods sold to calculate the Earnings ratio.