Earnings Defined And What Is The Difference Between Profit, Earnings And Revenue?
Earnings is another word for profit, but what makes it confusing is how people use it.
Defined: Revenue / Sales / Top Line
Typically, revenue is the same thing as "sales" or the "top line". They all appear at the top of the income statement.
For example, a retail store which sells 10 t-shirts for $10 each makes $100 in sales (10 x $10 each). That would also be the "revenue" and "top line".
So if a finance friend of yours (who likes to show off) says, "the top line was $100", all they are really doing is: a) trying to confuse you (because top line = revenue), b) just making things more complex.
Defined: Profit / Income / Earnings
When most people say, "profit" they normally mean "net profit".
The 'net' bit means that it is what's left over after costs, taxes, and the repayments of loans or debt. This is also called the "bottom line" because it normally appears at the bottom of a company's income statement.
Net earnings or "net income" is sometimes used instead of profit -- but they mean the same thing in this context.
When someone uses the words earnings, profit or income it's important to clarify what they mean because sometimes different figures get thrown around.
For example, some investors will often say "profit" but exclude the effect of taxes and interest costs. Or they might say "operating earnings" or "EBIT", which stands for earnings, before interest and taxes.
What's the difference between earnings and revenue?
The important thing to remember is how money falls down the income statement, such as the one shown above. It starts at revenue. Next, costs to buy goods are taken away, so are expenses (like wages), and debt repayments (interest cost) and taxes. Just be careful when you or someone else adds or subtracts something.
Test Your Knowledge
EPS stands for...
EPS stands for Earnings Per Share.
Basic and Diluted EPS are...
Basic and diluted EPS can be different figures because diluted EPS includes different types of investors -- not just shareholders with normal or 'common' shares. Diluted EPS accounts for options and preferred shares that may be issued by a company.
Ding Bats Ltd makes 5 million in profit and has only 5 million common shares outstanding. Ding Bats Ltd has EPS of:
Ding Bats Ltd has diluted earnings per share (EPS) of $1. That is, $5m (profit) / 5m shares outstanding.
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