What Are Company Earnings?
Company earnings (also known as net income, net profit, or profit) is the amount of money a business generates above and beyond what it pays out in expenses. To calculate net income, take the total revenues a company has generated, subtract all of its expenses, and then subtract additional costs such as taxes and interest payments.
Company earnings are a key metric for investors because it’s a snapshot of the financial health of a business. Over time, companies that grow their earnings represent a potentially rewarding investment opportunity.
Understanding Different Types of Earnings
When analyzing a company’s performance, it’s important to consider the type of earnings the company is recording. There are four main types of earnings:
-
GAAP earnings: Generally Accepted Accounting Principles (GAAP) accounting maintains uniform rules, processes, and practices for companies to report their finances.
-
Non-GAAP earnings: Sometimes companies use non-GAAP measures that don’t conform to GAAP. These can differ from GAAP in several ways, such as allowing companies to exclude particular expenses from their reported earnings.
-
Operating earnings: Operating earnings measure how successful a company is at generating profit from their day-to-day business operations. This measure typically doesn’t include one-off, non-operational events such as restructurings, asset write-downs, or legal judgments.
-
Adjusted earnings: This type of earnings measure is a combination of all of the various types of earnings, allowing investors to get a clearer picture of the financial performance of a company.
Why Do Investors Care About Earnings?
Investors care about earnings because it helps them make informed decisions about where to deploy their capital. The more an investor understands a company’s earnings, the more accurately they can estimate their potential return.
For example, if a company reports a net income of $1 billion over a certain period, that’s a good indication that the company is profitable and may be worth investing in. But if that company also reported non-GAAP earnings of $2 billion, that would even greater reassurance that the company is on sound financial footing.
In addition, examining earnings helps investors assess the future performance and value of a company. Earnings data allows investors to compare companies in the same sector to gauge which ones appear to be the more profitable.
Earnings also reveal whether or not a company is making progress over time. If a company earns more in year two than it did in year one, that’s a positive sign for investors who may be considering buying its stock.
When Are Earnings Reported?
Most companies report their earnings every quarter, thus offering investors a chance to keep track of their progress on a quarterly basis. Publicly traded companies typically report their results shortly after the close of each quarter.
How Are Earnings Communicated to Investors?
Once a company has reported their earnings, they’ll typically publish a release. This contains the main findings, along with a thorough explanation of the results. Companies will also typically host a conference call with investors, analysts, and the media where they discuss the earnings in more detail.
Analyzing Earnings
When it comes to interpreting a company’s earnings, investors should look beyond the headline number. While the reported earnings are of course important, investors should also look at the company’s operating performance. What type of operating margin is the company turning? How does their margin compare to the industry average?
Investors should also look at the year-over-year number. Did the company report a significant increase in earnings? If so, that’s a sign that the company is doing well.
Finally, investors should look at the forward-looking guidance the company provides. Companies typically give investors an indication of what to expect from their earnings over the next few quarters.
Company earnings are a key indicator of how well a business is doing financially, as well as how well it is likely to perform in the future. By examining earnings, investors can see whether or not a company is growing its profits and decide whether it holds any potential as a worthwhile investment opportunity. By understanding the different types of earnings, analyzing the results, and considering what the company has to say about the future, investors can form an informed opinion and make an educated decision about the potential reward of investing in the company.