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Earnings are the net benefits of a corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT -- earnings before interest and taxes, EBITDA - earnings before interest, taxes, depreciation, and amortization.
The amount of money that a company generates during a specific time period is called as ‘earnings’. This amount of money, to put it simply is the profits it has made in a certain amount of time which is usually defined as a quarter or a year.
Earnings: Simple to calculate or complex?
To elaborate this further, consider you have a company’s revenue that they have made from selling something. Now, from this revenue, you subtract the amount of money it took to produce whatever good or product that they made, which they sold, from which they got their revenue. Whatever money that you are left with in the end is going to be the company’s earnings. It is the money they made after selling something, and deducting all the costs that added up to make that something.
Although the explanation of earnings is simple, but let us just say that it is deceptively simple for there is a lot more that goes into calculating the earnings. However at the end of it you really are just measuring how much profit the company has made. Some people do get confused also because the wide array of synonyms that are often used for ‘earnings’ like ‘ net income’, ‘ bottom line’ etc without realizing that they all mean one and the same thing.
Investors and financial analysts use Earnings Per Share ratio to see and compare the earnings of different companies. It is pretty self explanatory; the easiest as well as the quickest way of finding out if a company is doing well is to have a look at its earnings and Earnings per Share ratio. To calculate EPS, you divide the earning left over for shareholders by the number of shares outstanding.
Another reason why earnings are considered so important is that they help drive stock prices. So the greater the earnings are, the stock prices would move up and the lower the earnings are, down the stock prices would move. This is why investors lay a lot of importance on earnings because they know that ultimately earnings are going to be the deciding factor of the stock prices.