Profit vs. Earnings: An Overview
Generally, profits and earnings are often considered synonyms differentiated by the adjectives that describe them. In the financial industry, the term earnings is most commonly used when discussing the bottom line of a company’s income statement. The net earnings of a company are the earnings achieved after all expenses have been subtracted. Net earnings are then used to calculate a company’s earnings per share (EPS) which is a popular metric for portraying the earnings of a company based on the number of publicly traded equity shares it has outstanding.
The term profit may more commonly be associated with the three most important points on the income statement. These items provide checkpoints for a company’s operational efficiency and are the gross profit, operating profit, and net profit. The term earnings can be used interchangeably for any of these measures, but typically profit is more commonly associated with the ratio calculations of gross profit margin, operating profit margin, and net profit margin.
Profits and earnings are primarily synonyms differentiated by the adjectives that describe them.
The gross profit margin, operating profit margin, and net profit margin are three key profit measures. Analysts use this data to analyze a company’s income statement and operating activities. The adjectives "gross," "operating," and "net" describes three distinctly different profit measures that help to identify the strengths and weaknesses of a company.
Gross profit, which is used to calculate gross profit margin, is a measure that analyzes a company’s cost of sales efficiency. The costs of sales figure include only direct expenses involved in generating a company’s products. The higher the gross profit and gross profit margin the better a company is efficiently creating the core products that build its business.
Operating profit is an analysis of a company’s indirect costs. Operating profit is in the second section of an income statement. The operating profit is calculated by subtracting all of a company’s indirect costs from the gross profit. In analyzing this measure, an analyst can see what types of endeavors a company is taking on to help grow the business. As such, indirect costs associated with operating profit margin may include marketing campaign expenses, general and administrative costs, and depreciation and amortization. The operating profit margin is calculated by dividing operating profit over sales. When calculating this ratio an analyst can compare a company’s gross profit efficiency versus operating profit efficiency to see how direct cost management differs from indirect cost management.
Net profit is calculated from the final section of an income statement. It is the result of operating profit minus interest and taxes, with interest and taxes being the last two factors to influence a company’s total earnings. Net profit is used in the calculation of net profit margin which gives the final portrayal of how much a company is earning per dollar of sales.
Earnings are most commonly associated with a company’s bottom line results. The bottom line shows how much a company has earned after subtracting all of its expenses. This measure can be referred to as net profit, net earnings, or net income.
Overall, it is the net value a company has achieved from operating activities for a specific reporting period. Companies also portray their net earnings by dividing it over shares outstanding in identifying earnings per share (EPS) value.
The net earnings of a company theoretically reflect an accounting value earned for a specific period. After the net earnings are calculated this value flows through to the balance sheet and cash flow statement.
On the balance sheet, net earnings are included as retained earnings in the equity section. Retained earnings for the balance sheet are calculated as beginning retained earnings + net income – dividends. On the cash flow statement, the net earnings begin the top line of the operating activities section.
The terms profit and earnings should be evaluated in context to understand their meaning best. Overall, these terms are primarily differentiated by the adjectives which precede them.
Gross profit and operating profit are terms used to analyze the first two segments of a company’s income statement respectively.
The bottom-line, net earnings, for a company will have a different connotation. Net earnings can also be expressed as net income or net profit. The net earnings of a company provide the most comprehensive measure of a company’s performance after all expenses are subtracted. Ultimately, it can be the most important number on the income statement because it comprehensively shows the company’s total earnings performance and is the value carried over to the balance sheet and cash flow statement.
- Profits and earnings are primarily synonyms differentiated by the adjectives that describe them.
- Gross profit, operating profit, and net profit are three main measures analysts evaluate on an income statement.
- The net earnings are found on the bottom line of an income statement.
- Net earnings show the total accounting earnings a company has achieved after subtracting all expenses.
- The net earnings value carries over into the balance sheet and cash flow statement for a company’s reporting period.