Definition of Sustainable Earnings
Reported earnings that have had the after-tax effects of all material
items of nonrecurring revenue or gain and expense or loss removed.
The active manipulation of earnings toward a predetermined target.
That target may be one set by management, a forecast made by analysts, or an amount that is consistent
with a smoother, more sustainable earnings stream. Often, although not always, earnings
management entails taking steps to reduce and “store” profits during good years for use during
slower years. This more limited form of earnings management is known as income smoothing.
A company's ability to generate a sustainable, and likely growing, stream of
earnings that provide cash flow.
earnings Management The active manipulation of earnings toward a predetermined target.
That target may be one set by management, a forecast made by analysts, or an amount that is consistent with a smoother, more sustainable earnings stream. Often, although not always, earnings management entails taking steps to reduce and “store” profits during good years for use during slower years. This more limited form of earnings management is known as income smoothing.
earnings of a firm as reported on its income statement.
Net income for the company during the period.
A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.
EPS, as it is called, is a company's profit divided by its number of outstanding
shares. If a company earned $2 million in one year had 2 million shares of stock outstanding, its EPS would
be $1 per share. The company often uses a weighted average of shares outstanding over the reporting term.
Positive or negative differences from the consensus forecast of earnings by institutions
such as First Call or IBES. Negative earnings surprises generally have a greater adverse affect on stock prices
than the reciprocal positive earnings surprise on stock prices.
The ratio of earnings per share after allowing for tax and interest payments on fixed interest
debt, to the current share price. The inverse of the price/earnings ratio. It's the Total Twelve Months earnings
divided by number of outstanding shares, divided by the recent price, multiplied by 100. The end result is
shown in percentage.
The real flow of cash that a firm could pay out forever in the absence of any change in
the firm's productive capacity.
earnings per share expressed as if all outstanding convertible securities
and warrants have been exercised.
The tendency of portfolios of stocks with a low price-earnings ratio to
outperform portfolios consisting of stocks with a high price-earnings ratio.
Shows the "multiple" of earnings at which a stock sells. Determined by dividing current
stock price by current earnings per share (adjusted for stock splits). earnings per share for the P/E ratio is
determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher
"multiple" means investors have higher expectations for future growth, and have bid up the stock's price.
Accounting earnings that are retained by the firm for reinvestment in its operations;
earnings that are not paid out as dividends.
Maximum rate of growth a firm can sustain without increasing financial leverage.
Earnings per share of common stock
How much profit a company made on each share of common stock this year.
Profits a company plowed back into the business over the years. Last January’s retained earnings, plus the net income or profit that a company made this year (which is calculated on the income statement), minus dividends paid out, equals the retained earnings balance on the balance sheet date.
Earnings before interest and taxes (EBIT)
The operating profit before deducting interest and tax.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
The operating profit before deducting interest, tax, depreciation and amortization.
The residual earnings of the company.
Statement Retained Earnings
One of the basic financial statements; it takes the beginning balance of retained earnings and adds net income, then subtracts dividends. The Statement of Retained earnings is prepared for a specified period of time.
basic earnings per share (EPS)
This important ratio equals the net
income for a period (usually one year) divided by the number capital
stock shares issued by a business corporation. This ratio is so important
for publicly owned business corporations that it is included in the daily
stock trading tables published by the Wall Street Journal, the New York
Times, and other major newspapers. Despite being a rather straightforward
concept, there are several technical problems in calculating
earnings per share. Actually, two EPS ratios are needed for many businesses—
basic EPS, which uses the actual number of capital shares outstanding,
and diluted EPS, which takes into account additional shares of
stock that may be issued for stock options granted by a business and
other stock shares that a business is obligated to issue in the future.
Also, many businesses report not one but two net income figures—one
before extraordinary gains and losses were recorded in the period and a
second after deducting these nonrecurring gains and losses. Many business
corporations issue more than one class of capital stock, which
makes the calculation of their earnings per share even more complicated.
diluted earnings per share (EPS)
This measure of earnings per share
recognizes additional stock shares that may be issued in the future for
stock options and as may be required by other contracts a business has
entered into, such as convertible features in its debt securities and preferred
stock. Both basic earnings per share and, if applicable, diluted
earnings per share are reported by publicly owned business corporations.
Often the two EPS figures are not far apart, but in some cases the
gap is significant. Privately owned businesses do not have to report earnings
per share. See also basic earnings per share.
earnings before interest and income tax (EBIT)
A measure of profit that
equals sales revenue for the period minus cost-of-goods-sold expense
and all operating expenses—but before deducting interest and income
tax expenses. It is a measure of the operating profit of a business before
considering the cost of its debt capital and income tax.
earnings per share (EPS)
See basic earnings per share and diluted earnings per share.
net income (also called the bottom line, earnings, net earnings, and net
This key figure equals sales revenue for a period
less all expenses for the period; also, any extraordinary gains and losses
for the period are included in this final profit figure. Everything is taken
into account to arrive at net income, which is popularly called the bottom
line. Net income is clearly the single most important number in business
price/earnings ratio (price to earnings ratio, P/E ratio, PE ratio)
This key ratio equals the current market price
of a capital stock share divided by the earnings per share (EPS) for the
stock. The EPS used in this ratio may be the basic EPS for the stock or its
diluted EPS—you have to check to be sure about this. A low P/E may signal
an undervalued stock or may reflect a pessimistic forecast by
investors for the future earnings prospects of the business. A high P/E
may reveal an overvalued stock or reflect an optimistic forecast by
investors. The average P/E ratio for the stock market as a whole varies
considerably over time—from a low of about 8 to a high of about 30.
This is quite a range of variation, to say the least.
Basic Earnings Power Ratio
Percentage of earnings relative to total assets; indication of how
effectively assets are used to generate earnings. It is calculated by
dividing earnings before interest and taxes by the book value of all
Earnings per Share
A measure of the earnings generated by a company on a per
share basis. It is calculated by dividing income available for
distribution to shareholders by the number of common shares
Price to Earnings Ratio (P/E, PE Ratio)
A measure of how much investors are willing to pay for each dollar
of a company's reported profits. It is calculated by dividing the
market price per share by the earnings per share.
A company’s accumulated earnings since its inception, less any distributions to shareholders.
Statement of retained earnings
An adjunct to the balance sheet, providing more detailed information about the beginning balance, changes, and ending balance in
the retained earnings account during the reporting period.
price-earnings (P/E) multiple (ratio)
Ratio of stock price to earnings per share.
earnings not paid out as dividends.
sustainable growth rate
Steady rate at which a firm can grow without changing leverage; plowback ratio × return on equity.
Roth IRA. An IRA account whose earnings are not taxable at all under certain
Abusive Earnings Management
The use of various forms of gimmickry to distort a company's true financial performance in order to achieve a desired result.
Abusive Earnings Management
A characterization used by the Securities and Exchange
Commission to designate earnings management that results in an intentional and material misrepresentation
Net income adjusted to exclude selected nonrecurring and noncash items of reserve, gain, expense, and loss.
A measure of earnings that includes only the results of the primary operating
activities of the firm. It is most common to see the measure used by financial firms.
Cost Plus Estimated Earnings in Excess of Billings
Revenue recognized to date under the percentage-of-completion method in excess of amounts billed. Also known as unbilled accounts
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
An earningsbased measure that, for many, serves as a surrogate for cash flow. Actually consists of working
capital provided by operations before interest and taxes.
EBBS - Earnings before the bad stuff
An acronym attributed to a member of the Securities and
Exchange Commission staff. The reference is to earnings that have been heavily adjusted to
remove a wide range of nonrecurring, nonoperating, and noncash items.
EBDDT - Earnings before depreciation and deferred taxes
This measure is used principally by
firms in the real estate industry, with the exception of real estate investment trusts, which typically
do not pay taxes.
A term frequently used to describe earnings after the removal of the
effects of nonrecurring or nonoperating items.
Operational Earnings Management
Management actions taken in the effort to create stable
financial performance by acceptable, voluntary business decisions. An example: a special discount
promotion to increase flagging sales near the end of a quarter when targets are not being met.
earnings before the effects of any earnings-management activities.
Reported net income with selected nonrecurring items of revenue or gain
and expense or loss deducted from or added back, respectively, to reported net income. Occasionally
selected nonoperating or noncash items are also treated as adjustment items.
Real Actions (Earnings) Management
Involves operational steps and not simply acceleration
or delay in the recognition of revenue or expenses. The delay or acceleration of shipment would
be an example.
In general, refers to a company's total sales less cost of sales and operating expenses, including interest and income tax.
Price / Earnings (P/E) Ratio
The ratio of price to earnings. Faster growing or less-risky firms typically have higher P/E ratios than either slower-growing or more risky firms.
Net profits kept to accumulate in a business after dividends are paid.
A company's ability to generate a sustainable, and likely growing, stream of
earnings that provides cash flow.
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