5

I am reading through a company's annual report trying to do research on whether I should invest in them.

I'm new at all this and it's got a lot of complicated terms which I'm unsure about.

One thing I'm trying to figure out is whether there is a difference between a company's earnings vs their profits?

I seem to be getting conflicting views with various sources. http://www.wisegeek.com/what-is-the-difference-between-earnings-and-profit.htm these guys say they're different although their example is a little unclear.

http://www.investopedia.com/articles/basics/03/052303.asp these guys say they can be used interchangeably

11

Wisegeeks are explaining it well, Investopedia are mentioning it briefly. The difference is in the accounting treatment.

Earnings = revenue - production costs.

Profits = total revenue - total expenses.

The difference is hard to notice, but significant: for example if your company is making ice cream, then the earnings would be the revenue from selling ice cream minus all the costs to produce ice cream (including materials, salary, equipment, transportation, etc).

But the profits would also include other revenue (for example - interest on cash in the bank), reduced by other expenses (for example, the CEO's vacation with the mistress to Argentina).

Large difference between earnings and profits may suggest that the company spends a lot of money on unrelated activities (for negative difference) or has a lot of unrelated income (for positive difference).

Differences in accounting methods (for example GAAP vs IFRS) may also contribute to the difference between the revenue and the profits.

  • ok so how do they determine what is "production cost vs other expenses" when it's a company that produces a product that is not as tangible as ice cream? Like say Facebook - they produce a website so would production cost only be developer's time? Or would it include marketing/sales ppl, bandwidth/hosting costs etc as well? – Joe.E Jun 12 '13 at 6:06
  • 1
    They don't. Accountants do. There are certain principles and guidelines, and different sets of those. As I mentioned - there's GAAP in use (still) in the US, there's IFRS in use elsewhere - these regulations dictate how to recognize income, expenses, and what is a production-related expense and what is not. Generally, if you read an audited statement - that has been determined properly. – littleadv Jun 12 '13 at 6:13
  • 1
    I'd add that in the specific context of "earnings per share" (EPS), earnings are synonymous with profits, because EPS is the all-in profit amount divided by the number of outstanding shares. This link explains. – Chris W. Rea Jun 12 '13 at 12:44

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.