UK Accounting Glossary
In everyday speech, earnings is often used interchangeably with income and profits to mean some positive financial increase. In investing, however, earnings are more likely to describe what is leftover in a given accounting period after all revenues and gains, and all expenses and losses, have been totalled. 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 do have the advantage of matching income and expense for a period and thus smoothing the irregularity of cash flows. But earnings are also subject to accounting’s vagaries, which in a complex business world can lead to numbers that are more than a little theoretical. Earnings are 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.
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This glossary post was last updated: 9th February 2020.