If you are a worker, your earnings are the money the employer gives in exchange for the services that you rendered. While this definition of the word is accurate, the meaning of “earnings” becomes a bit more complex when we refer to the earnings of a company.
What are earnings?
The earnings of a company are its net income. Earnings are also called the bottom line, net earnings, and profit. This is the revenue that is left after accounting for taxes, deductions, and other business expenses over a specific period.
In the business space, a company’s earnings determine its success. It is the primary parameter that is analyzed in a company’s financial statements.
How are a company’s Earnings calculated?
To compute a company’s earnings, remember this equation:
Earnings = Revenue - Cost of Sales
Cost of sales are taxes, deductions, operating expenses, and all other business expenses.
Let’s have an example:
Jane owns a small business. For 2020, the gross sales were $500,000. The cost of the products sold was $300,000, taxes were $20,000, and the operating expenses were $80,000.
Get the cost of sales by adding the cost of products, taxes, and operating expenses.
$300,000 + $20,000 + $80,000 = $400,000
Subtract the cost of sales from gross sales.
$500,000 -$400,000 = $100,000
The company’s net earnings are $100,000.
Why are earnings significant?
It is crucial to pay close attention to a company’s earnings because it is the lifeline of a company. Directly measuring financial health, earnings show how a company is performing or has performed over a specific period. Earnings offer an objective way to compare a company against its competitors.
For businesses that are publicly traded, earnings are significant in that it has the most impact on the company’s share price. Earnings can be re-invested in the business or they can be given to the company’s stockholders as dividends.
Earnings are commonly measured in specific periods which are usually quarterly or annually. A company that performs above the expectations of analysts will attract more investors. On the other hand, earnings that fall short of expectations may be looked upon as a risky investment.
Earnings can be measured in different ways depending on how they are studied. Here are some examples:
Earnings before taxes (EBT);
Earnings before interest and taxes (EBIT);
Earnings before interest, taxes, depreciation, and amortization (EBITDA);
I own a small private company. Am I required to make my company’s earnings public?
No, private companies in the United States are not required to disclose their company’s earnings and other financial information to the public. However, they are required to file their financial records with the secretary of state in the state where the business is registered and operates. The Internal Revenue Service (IRS) requires private companies to file quarterly tax estimates and an annual tax return to compute tax liabilities.
When must public companies report their earnings?
Public companies are required to follow the rules of the Securities and Exchange Commission (SEC) in filing earnings reports. The earnings reports must be filed not later than 35 days after the end of a company’s first three quarters and annual reports 60 days after the end of their fiscal year. It is important to note that the end of the fiscal year for most companies is different from the calendar year.
These financial reports are public records and are meant to keep the company’s investors, shareholders, potential investors, and investment analysts abreast of the company’s performance.
As previously mentioned, a company’s earnings reflect how it has performed. These numbers have a definite impact on investors and clients. Because of this, some may attempt to manipulate the numbers to arrive at a better figure. This practice is illegal and should never be tolerated.
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