Earnings and income are often used interchangeablyand are thus considered synonymous with each other—and many times, they are. However, there are various types or classifications of earnings and income that each have slightly different meanings.
Key Takeaways
- Earnings and income both refer to a company's bottom line: the amount of profit left over after paying all expenses.
- Income can be designated as gross vs. net, or by source such as interest income vs. income from operations.
- Earnings can also be segmented as earnings per share (EPS); retained earnings; or earnings before interest, tax, depreciation, and amortization (EBITDA).
Earnings
Earnings typically refer to after-taxnet income, sometimes known as thebottom lineor a company'sprofits. Earnings are the main determinant of a company's share price because earnings and the circ*mstances relating to them can indicate whether the business will be profitable and successful in the long run.
Earnings are perhaps the single most important and most studied number in a company's financial statements. It shows profitability compared to analyst estimates, the company's own historical performance, and relative to its competitors and industry peers.
Earningsare the profit a company has earned for a period of time, usually a quarter or fiscal year. The earnings figure is listed asnet incomeon the income statement. When investors refer toacompany's earnings, they're typically referring tonet income or theprofit for the period. Similarly,income is considered synonymous with net income or profit.
Earnings per Share
Earnings per share (EPS) is a commonly cited ratio used to show the company's profitability on a per-share basis and is calculated by dividing the company's total earnings by the number of shares outstanding.
Price-to-Earnings Ratio
It is also commonly used in relative valuation measures such as the price-to-earnings ratio (P/E). The price-to-earnings ratio, calculated as share price divided by earnings per share, is primarily used to find relative values for the earnings of companies in the same industry. A company with a high P/E ratiorelative to its industry peers may be considered overvalued. Likewise, a company with a low price compared withthe earnings it makes might be undervalued.
Earnings Yield
Theearnings yield—the earnings per share for the most recent 12-month period divided by the current market price per share—is another way of measuring earnings, and is in fact just the inverse of the P/E ratio.
Income
Both net income and earnings are often referred to as a company's bottom linebecause it's the profit left over after every cost has been deducted and as a result, sits at the bottom of the income statement.
Conversely, revenuesits at the top of the income statement and shouldn't be confused with earnings or net income. Revenue is the total amount of income earned in aperiod before expenses have been taken out. As a result, revenueis often called the top line.
Net Income
Net Incomeis a company'sprofitafter allexpenseshave been subtractedfrom total revenue.Typical expenses mightinclude interest on loans, overhead costs called selling, general, and administrative expense,income taxes,depreciation,and operating expenses such as wages, rent, and utilities.
Earnings and net income can includeincome that's not a direct result of the sale of goods and services, which can include proceeds from the sale of an asset or division, and interest gains on investments.
Gross Income
A company's gross income is perhaps the most simple measure of the firm's profitability. While the gross income metric includes the direct cost of producing or providing goods and services, it does not include other costs related to selling activities, administration, taxes, and other costs related to running the overall business.
Gross income is a line item that is sometimes included in a company'sincome statementbut is not required. It is calculated as gross revenueminus cost of goods sold (COGS).
Other Typesof IncomeandEarnings
Retained Earnings
Retained earningsare the cumulative total of profit or net income that a company has put aside or saved for future use. Retained earnings is an important financial metric since it shows investors how much money is available to fund share buybacks, dividends, pay down debt, or invest in the company throughthe purchase of fixed assets.Retained earnings are listed inthe shareholders' equity sectionofthebalance sheet.
Investment Income
Investment income can be a source of income for companies as well as individual investors. A company's income statement might have a line item that reads investment income or losses, which is where the company reports the portion of net income obtained through investments. These investments might include bonds or Treasurysecurities.
