What are earnings? Definition and meaning
The term earnings refers to the amount of profit produced by a company during a specific period (typically in quarters). It consists of revenues minus operating expenses, cost of sales, and taxes over a specified period.
It is one of the main components for calculating the price per share.
When earnings do not meet estimates made by analysts, the company’s stock price will usually decrease. On the other hand, when earnings beat estimates, the share price will probably rise.
Earnings results help investors evaluate whether or not a business can achieve successful long term profitability.
In some cases, low or negative earnings do not necessarily point to a bad stock. For example, a young company may report negative earnings as it attempts to grow rapidly enough to capture a new market. Investors accept this initial situation, because if the business achieves its aim it will eventually become much more profitable.
Earnings may sometimes be expressed as:
– EBIT, which stands for earnings before interest and taxes
– EBITDA, which stands for earnings before, taxes, depreciation and amortization. Analysts use EBITDA to analyze and compare profitability between companies and industries, given that it eliminates the effects of accounting decisions and financing.
– Earnings per share. This is the net profit divided by the total number of shares.
Earnings may also refer to the salary/wages of an employee.
Obsession with earnings
If a company’s management focuses too much on earnings, they could be contributing towards its eventual death.
Spending on research and development may reduce earnings, but it eventually brings new and exciting products. A growing number of experts today comment that the current obsession with trying to get maximum quarterly earnings undermines companies’ futures.
John Francis ‘Jack’ Welch, Jr., who was chairman and CEO of General Electric between 1981 and 2001, once said about earnings:
“Any jerk can have short-term earnings. You squeeze, squeeze, squeeze, and the company sinks five years later.”
John Maeda, a Japanese-American graphic designer, computer scientist, academic and author, said:
“Corporations today, by their razor sharp focus on the ‘bottom line’ and quarterly earnings, have lost their ability to innovate.”