Corporate earnings, or profit, are the amount of money a company keeps after all its expenses have been deducted. It’s calculated as revenue (or sales) minus cost of goods sold, operating expenses, and other items like interest, taxes, and depreciation. Other more specific terms are often used, such as earnings per share or EBITDA (earnings before interest, taxes, depreciation and amortization). All publicly traded companies report their earnings on a quarterly basis to comply with regulatory requirements, but these reports also serve as a window into the health of the economy.
Earnings are important for both investors and the economy because they provide a gauge of how efficiently businesses are running their operations. They also incentivize businesses to continue investing in their assets and production capacity, which helps to keep the economy growing.
Many market participants closely watch and analyze corporate earnings to help inform their investment decisions. The information can also be used to assess the economic health of the overall economy, as central banks use aggregate corporate profits to guide monetary policy.
Corporate profitability can be affected by a variety of factors, including operational efficiency, product demand, and economic conditions. For example, if a business invests in improving its supply chain or developing new products, it can lower costs and increase revenue over time. Inflation and changing consumer spending habits can also affect revenue and overall profitability. However, it’s important to note that while corporate profits tend to move up and down with overall business activity, they rarely outperform employee wages over the long term.