Definition of Earnings

Earnings

In general, refers to a company's total sales less cost of sales and operating expenses, including interest and income tax.

Earnings

Net income for the company during the period.

Accounting earnings

earnings of a firm as reported on its income statement.

Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.

Earnings per share (EPS)

EPS, as it is called, is a company's profit divided by its number of outstanding
shares. If a company earned $2 million in one year had 2 million shares of stock outstanding, its EPS would
be $1 per share. The company often uses a weighted average of shares outstanding over the reporting term.

Earnings retention ratio

Plowback rate.

Earnings surprises

Positive or negative differences from the consensus forecast of earnings by institutions
such as First Call or IBES. Negative earnings surprises generally have a greater adverse affect on stock prices
than the reciprocal positive earnings surprise on stock prices.

Earnings yield

The ratio of earnings per share after allowing for tax and interest payments on fixed interest
debt, to the current share price. The inverse of the price/earnings ratio. It's the Total Twelve Months earnings
divided by number of outstanding shares, divided by the recent price, multiplied by 100. The end result is
shown in percentage.

Economic earnings

The real flow of cash that a firm could pay out forever in the absence of any change in
the firm's productive capacity.

Fully diluted earnings per shares

earnings per share expressed as if all outstanding convertible securities
and warrants have been exercised.

Low price-earnings ratio effect

The tendency of portfolios of stocks with a low price-earnings ratio to
outperform portfolios consisting of stocks with a high price-earnings ratio.

Price/earnings ratio (PE ratio)

Shows the "multiple" of earnings at which a stock sells. Determined by dividing current
stock price by current earnings per share (adjusted for stock splits). earnings per share for the P/E ratio is
determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher
"multiple" means investors have higher expectations for future growth, and have bid up the stock's price.

Retained earnings

Accounting earnings that are retained by the firm for reinvestment in its operations;
earnings that are not paid out as dividends.

Earnings per share of common stock

How much profit a company made on each share of common stock this year.

RETAINED EARNINGS

Profits a company plowed back into the business over the years. Last January’s retained earnings, plus the net income or profit that a company made this year (which is calculated on the income statement), minus dividends paid out, equals the retained earnings balance on the balance sheet date.

Earnings before interest and taxes (EBIT)

The operating profit before deducting interest and tax.

Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.

Retained earnings

The residual earnings of the company.

Statement Retained Earnings

One of the basic financial statements; it takes the beginning balance of retained earnings and adds net income, then subtracts dividends. The Statement of Retained earnings is prepared for a specified period of time.

basic earnings per share (EPS)

This important ratio equals the net
income for a period (usually one year) divided by the number capital
stock shares issued by a business corporation. This ratio is so important
for publicly owned business corporations that it is included in the daily
stock trading tables published by the Wall Street Journal, the New York
Times, and other major newspapers. Despite being a rather straightforward
concept, there are several technical problems in calculating
earnings per share. Actually, two EPS ratios are needed for many businesses—
basic EPS, which uses the actual number of capital shares outstanding,
and diluted EPS, which takes into account additional shares of
stock that may be issued for stock options granted by a business and
other stock shares that a business is obligated to issue in the future.
Also, many businesses report not one but two net income figures—one
before extraordinary gains and losses were recorded in the period and a
second after deducting these nonrecurring gains and losses. Many business
corporations issue more than one class of capital stock, which
makes the calculation of their earnings per share even more complicated.

diluted earnings per share (EPS)

This measure of earnings per share
recognizes additional stock shares that may be issued in the future for
stock options and as may be required by other contracts a business has
entered into, such as convertible features in its debt securities and preferred
stock. Both basic earnings per share and, if applicable, diluted
earnings per share are reported by publicly owned business corporations.
Often the two EPS figures are not far apart, but in some cases the
gap is significant. Privately owned businesses do not have to report earnings
per share. See also basic earnings per share.

earnings before interest and income tax (EBIT)

A measure of profit that
equals sales revenue for the period minus cost-of-goods-sold expense
and all operating expenses—but before deducting interest and income
tax expenses. It is a measure of the operating profit of a business before
considering the cost of its debt capital and income tax.

earnings per share (EPS)

See basic earnings per share and diluted earnings per share.

net income (also called the bottom line, earnings, net earnings, and net

operating earnings)
This key figure equals sales revenue for a period
less all expenses for the period; also, any extraordinary gains and losses
for the period are included in this final profit figure. Everything is taken
into account to arrive at net income, which is popularly called the bottom
line. Net income is clearly the single most important number in business
financial reports.

price/earnings ratio (price to earnings ratio, P/E ratio, PE ratio)

This key ratio equals the current market price
of a capital stock share divided by the earnings per share (EPS) for the
stock. The EPS used in this ratio may be the basic EPS for the stock or its
diluted EPS—you have to check to be sure about this. A low P/E may signal
an undervalued stock or may reflect a pessimistic forecast by
investors for the future earnings prospects of the business. A high P/E
may reveal an overvalued stock or reflect an optimistic forecast by
investors. The average P/E ratio for the stock market as a whole varies
considerably over time—from a low of about 8 to a high of about 30.
This is quite a range of variation, to say the least.

Basic Earnings Power Ratio

Percentage of earnings relative to total assets; indication of how
effectively assets are used to generate earnings. It is calculated by
dividing earnings before interest and taxes by the book value of all
assets.

Earnings per Share

A measure of the earnings generated by a company on a per
share basis. It is calculated by dividing income available for
distribution to shareholders by the number of common shares
outstanding.

Price to Earnings Ratio (P/E, PE Ratio)

A measure of how much investors are willing to pay for each dollar
of a company's reported profits. It is calculated by dividing the
market price per share by the earnings per share.

Retained earnings

A company’s accumulated earnings since its inception, less any distributions to shareholders.

Statement of retained earnings

An adjunct to the balance sheet, providing more detailed information about the beginning balance, changes, and ending balance in
the retained earnings account during the reporting period.

price-earnings (P/E) multiple (ratio)

Ratio of stock price to earnings per share.

retained earnings

earnings not paid out as dividends.

Roth IRA. An IRA account whose earnings are not taxable at all under certain

circumstances.

Abusive Earnings Management

The use of various forms of gimmickry to distort a company's true financial performance in order to achieve a desired result.

Abusive Earnings Management

A characterization used by the Securities and Exchange
Commission to designate earnings management that results in an intentional and material misrepresentation
of results.

Adjusted Earnings

Net income adjusted to exclude selected nonrecurring and noncash items of reserve, gain, expense, and loss.

Core Earnings

A measure of earnings that includes only the results of the primary operating
activities of the firm. It is most common to see the measure used by financial firms.

Cost Plus Estimated Earnings in Excess of Billings

Revenue recognized to date under the percentage-of-completion method in excess of amounts billed. Also known as unbilled accounts
receivable.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working
capital provided by operations before interest and taxes.

Earnings Management

The active manipulation of earnings toward a predetermined target.
That target may be one set by management, a forecast made by analysts, or an amount that is consistent
with a smoother, more sustainable earnings stream. Often, although not always, earnings
management entails taking steps to reduce and “store” profits during good years for use during
slower years. This more limited form of earnings management is known as income smoothing.

EBBS - Earnings before the bad stuff

An acronym attributed to a member of the Securities and
Exchange Commission staff. The reference is to earnings that have been heavily adjusted to
remove a wide range of nonrecurring, nonoperating, and noncash items.

EBDDT - Earnings before depreciation and deferred taxes

This measure is used principally by
firms in the real estate industry, with the exception of real estate investment trusts, which typically
do not pay taxes.

Operating Earnings

A term frequently used to describe earnings after the removal of the
effects of nonrecurring or nonoperating items.

Operational Earnings Management

Management actions taken in the effort to create stable
financial performance by acceptable, voluntary business decisions. An example: a special discount
promotion to increase flagging sales near the end of a quarter when targets are not being met.

Premanaged Earnings

earnings before the effects of any earnings-management activities.

Pro-Forma Earnings

Reported net income with selected nonrecurring items of revenue or gain
and expense or loss deducted from or added back, respectively, to reported net income. Occasionally
selected nonoperating or noncash items are also treated as adjustment items.

Real Actions (Earnings) Management

Involves operational steps and not simply acceleration
or delay in the recognition of revenue or expenses. The delay or acceleration of shipment would
be an example.

Sustainable Earnings

Reported earnings that have had the after-tax effects of all material
items of nonrecurring revenue or gain and expense or loss removed.

Price / Earnings (P/E) Ratio

The ratio of price to earnings. Faster growing or less-risky firms typically have higher P/E ratios than either slower-growing or more risky firms.

Retained Earnings

Net profits kept to accumulate in a business after dividends are paid.

Antidilutive effect

Result of a transaction that increases earnings per common share (e.g. by decreasing the
number of shares outstanding).

Attribute bias

The tendency of stocks preferred by the dividend discount model to share certain equity
attributes such as low price-earnings ratios, high dividend yield, high book-value ratio or membership in a
particular industry sector.

Average accounting return

The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.

Capitalization ratios

Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.

Cash cow

A company that pays out all earnings per share to stockholders as dividends. Or, a company or
division of a company that generates a steady and significant amount of free cash flow.

Cash flow

In investments, it represents earnings before depreciation , amortization and non-cash charges.
Sometimes called cash earnings. Cash flow from operations (called funds from operations ) by real estate and
other investment trusts is important because it indicates the ability to pay dividends.

Cash flow coverage ratio

The number of times that financial obligations (for interest, principal payments,
preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental
payments, and depreciation.

Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.

Common stock ratios

Ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.

Coverage ratios

Ratios used to test the adequacy of cash flows generated through earnings for purposes of
meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.

Debt-service coverage ratio

earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.

Dilutive effect

Result of a transaction that decreases earnings per common share.

Discount rate

The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is
temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the
Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.

Distributions

Payments from fund or corporate cash flow. May include dividends from earnings, capital
gains from sale of portfolio holdings and return of capital. Fund distributions can be made by check or by
investing in additional shares. Funds are required to distribute capital gains (if any) to shareholders at least
once per year. Some Corporations offer Dividend Reinvestment Plans (DRP).

Dividend payout ratio

Percentage of earnings paid out as dividends.

Earning power

earnings before interest and taxes (EBIT) divided by total assets.

Equity claim

Also called a residual claim, a claim to a share of earnings after debt obligation have been
satisfied.

Fixed-charge coverage ratio

A measure of a firm's ability to meet its fixed-charge obligations: the ratio of
(net earnings before taxes plus interest charges paid plus long-term lease payments) to (interest charges paid
plus long-term lease payments).

Foreign tax credit

Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.

Forward looking multiple

A truncated expression for a P/E ratio that is based on forward (expected)
earnings rather than on trailing earnings.

Free cash flows

Cash not required for operations or for reinvestment. Often defined as earnings before
interest (often obtained from operating income line on the income statement) less capital expenditures less the
change in working capital.

Fundamental analysis

Security analysis that seeks to detect misvalued securities by an analysis of the firm's
business prospects. Research analysis often focuses on earnings, dividend prospects, expectations for future
interest rates, and risk evaluation of the firm.

Funds From Operations (FFO)

Used by real estate and other investment trusts to define the cash flow from
trust operations. It is earnings with depreciation and amortization added back. A similar term increasingly
used is Funds Available for Distribution (FAD), which is FFO less capital investments in trust property and
the amortization of mortgages.

Growth manager

A money manager who seeks to buy stocks that are typically selling at relatively high P/E
ratios due to high earnings growth, with the expectation of continued high or higher earnings growth.

Growth phase

A phase of development in which a company experiences rapid earnings growth as it produces
new products and expands market share.

Income bond

A bond on which the payment of interest is contingent on sufficient earnings. These bonds are
commonly used during the reorganization of a failed or failing business.

Interest coverage ratio

The ratio of the earnings before interest and taxes to the annual interest expense. This
ratio measures a firm's ability to pay interest.

Interest subsidy

A firm's deduction of the interest payments on its debt from its earnings before it calculates
its tax bill under current tax law.

Internal finance

Finance generated within a firm by retained earnings and depreciation.

Inventory

For companies: Raw materials, items available for sale or in the process of being made ready for
sale. They can be individually valued by several different means, including cost or current market value, and
collectively by FIFO, LIFO or other techniques. The lower value of alternatives is usually used to preclude
overstating earnings and assets.
For security firms: securities bought and held by a broker or dealer for resale.

Lynch & Co

Liquidating dividend
Payment by a firm to its owners from capital rather than from earnings.

Liquidating dividend

Payment by a firm to its owners from capital rather than from earnings.

Maturity phase

A phase of company development in which earnings continue to grow at the rate of the
general economy. Related: Three-phase DDM.

Multiples

Another name for price/earnings ratios.

Net income

The company's total earnings, reflecting revenues adjusted for costs of doing business,
depreciation, interest, taxes and other expenses.

Net worth

Common stockholders' equity which consists of common stock, surplus, and retained earnings.

Operating cash flow

earnings before depreciation minus taxes. It measures the cash generated from
operations, not counting capital spending or working capital requirements.

P/E (PE)

See Price/earnings ratio.

P/E ratio (PE ratio / multiple)

Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year; $25. 50 = 10
times $2. 55
XYZ stock sells for 10 times earnings. P/E = Current stock price divided by trailing annual earnings per
share or expected annual earnings per share.

Payout ratio

Generally, the proportion of earnings paid out to the common stockholders as cash dividends.
More specifically, the firm's cash dividend divided by the firm's earnings in the same reporting period.

Performance shares

Shares of stock given to managers on the basis of performance as measured by earnings
per share and similar criteria. A control device used by shareholders to tie management to the self-interest of
shareholders.

Preferred shares

Preferred shares give investors a fixed dividend from the company's earnings. And more
importantly: preferred shareholders get paid before common shareholders. See: preferred stock.

Preferred stock

A security that shows ownership in a corporation and gives the holder a claim, prior to the
claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most
preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar
amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares
characteristics of both common stock and debt.

Profit margin

Indicator of profitability. The ratio of earnings available to stockholders to net sales.
Determined by dividing net income by revenue for the same 12-month period. Result is shown as a
percentage.

Retention rate

The percentage of present earnings held back or retained by a corporation, or one minus the
dividend payout rate. Also called the retention ratio.

Return on total assets

The ratio of earnings available to common stockholders to total assets.

Risk indexes

Categories of risk used to calculate fundamental beta, including (1) market variability, (2)
earnings variability, (3) low valuation, (4) immaturity and smallness, (5) growth orientation, and (6) financial risk.

Share repurchase

Program by which a corporation buys back its own shares in the open market. It is usually
done when shares are undervalued. Since it reduces the number of shares outstanding and thus increases
earnings per share, it tends to elevate the market value of the remaining shares held by stockholders.

Signaling view (on dividend policy)

The argument that dividend changes are important signals to investors
about changes in management's expectation about future earnings.

Simple linear trend model

An extrapolative statistical model that asserts that earnings have a base level and
grow at a constant amount each period.

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