Good earnings on the net, Earnings and EPS: Everything Investors Need to Know
Revenue is also known as the top line and refers to the company's total sales.
Net income is known as the bottom line, and is the amount of profit the company made after paying all of its expenses. This is also known as the company's earnings. How net income is calculated When calculating net income, start with the top line, or revenue number.
Then, subtract the cost of the revenue in order to calculate the gross profit. Cost of revenue refers to the amount the company paid to manufacture and sell its product.
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As an example, if you're selling t-shirts, the cost of the cotton you use would be subtracted as part of the cost of revenue. Next, subtract the operating expenses such as research and development costs and administrative expenses. This will result in the company's operating income.
It is a tool that market participants use frequently to gauge the profitability of a company before buying its shares. It is a term that is of much importance to investors and people who trade in the stock market.
Finally, subtract taxes, interest, and any other expenses to arrive at the net income. Why it matter to good earnings on the net Net income lets you know how much profit the company made after paying all of its expenses.
Two companies could generate the same EPS, but one could do so with fewer net assets; that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company in terms of efficiency. A metric that can be used to identify companies that are more efficient is the return on equity ROE.
This is significant to you as an investor because this is the amount of money the company has available to pay dividends, repurchase shares, reinvest in the business, or simply add to its cash. Furthermore, if you divide the net income by the number of outstanding shares, this is how you calculate the widely used earnings per share EPS metric, which can help you assess a stock's valuation and calculate several other metrics as well.
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