Corporate earnings refer to how much money a company or corporation makes in a particular time period. The most common time frame is quarterly, but some companies report on a yearly basis. Earnings are calculated by subtracting company expenses from total company revenue. A large amount of attention is put on these reports because the results can have real world repercussions. A good or bad earnings report can send a stock soaring or plummeting, and even a few key company reports can make or break major market indexes.
Earnings are important because they indicate a company’s financial health, and can be used to attract investors and reward current shareholders. Profits also provide incentives for companies to continue growing and investing, which can lead to economic growth.
While many people use the terms “earnings” and “profit” interchangeably, it’s important to understand that earnings are actually a percentage of revenue—or, more specifically, net income after taxes. This calculation excludes things like minority interest, equity income, and investment income, which can differ widely from one company to the next.
There are several different ways a company can choose to distribute its profits. Some companies choose to reinvest in their business, while others may pay out dividends or buy back shares. Regardless of the method, the resulting distributions have real world effects on consumers and the economy. In the short term, higher corporate earnings can boost consumer spending and help the economy recover from a downturn.