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In everyday speech, earnings is often used interchangeably with income and profits to mean some positive financial increase. In investing, however, earnings is more likely to describe what is left over in a given accounting period after all revenues and gains, and all expenses and losses, have been totaled. Thus earnings per share means net income per share. As the "bottom line," earnings is the key measure of business success, and the price to earnings ratio is the best-known valuation measure of a stock. Yet earnings should not be the lone yardstick for measuring company results. Earnings does have the advantage of matching income and expense for a period and thus smoothing the irregularity of cash flows. But earnings is also subject to accounting's vagaries, which in a complex business world can lead to numbers that are more than a little theoretical. Earnings is also of little help in determining the value of new ventures, which may have few earnings initially but the potential to produce substantial cash flows in the future. |
