Earnings

Earnings are the profits generated by a business. They are derived by subtracting the cost of goods sold, operating expenses, and taxes from revenue. The generation of earnings is a key driving force behind the formation and subsequent operation of a business. Earnings can then be used to pay dividends to shareholders. If a company is still growing and does not have sufficient cash to distribute as dividends, earnings might instead be held within the business; if so, investors can profit from an increase in the market value of the company stock that they hold.

Earnings tend to be quite low or negative during the early years of a business, when it is spending money to build products and services, as well as to expand its market presence. Once the business is established, its earnings are typically both larger and more consistent. If the decision is made to run down and liquidate a business, it is possible that earnings will briefly be quite high, since the sales and marketing expenses that it usually incurs to maintain market share among customers are no longer being incurred. Thus, there is a definite pattern to the timing of earnings generation over the life of a business.

If a company is publicly held, the amount of earnings reported is a significant driver of its stock price. If the amount is lower than expected by analysts, the stock price could drop sharply, even though the amount may meet or exceed the company's own expectations.

Similar Terms

Earnings is also known as income.