Reported earnings: what they are and how to calculate them

By Indeed Editorial Team

Published 25 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Reported earnings refer to one of the most effective ways to monitor the performance of your stocks. Publicly-traded corporations produce these reports a few times a year and give useful information about how they function. Professionals utilise earnings reports to determine the worth of a company's shares and the effectiveness of its management. In this article, we explain what reported earnings are, why they're significant, how to calculate them and what they include.

What are reported earnings?

Reported earnings make up the most common way for a publicly listed business to publish its financial performance for a certain period. Investors might use a company's earnings reports to get a sense of how effectively it's run and whether it's operating well. It's worth noting, though, that earnings reports frequently provide a bright image of the financial position of a company. As a result, learning to read and analyse an earnings report remains critical to distinguish between the leadership team's marketing pitch and facts.

Related: Gross pay vs. net pay: definitions and examples

The importance of earnings reports

Earnings reports remain significant not only because companies have a legal obligation to post them, but also because they provide shareholders and investors with information about the company's performance. Unlike privately owned corporations, which do not have an obligation to reveal any information to the general public, publicly listed companies have an obligation to reveal all relevant information. These declarations are crucial because they enable investors to analyse a company's value and worth.

A company's shares begin to move more than usual in the time leading up to the announcement of quarterly earnings reports. Whilst the price of a company's stock is available, it fluctuates dramatically depending on the information in the financial results. Earnings reports show how much money a business made or wasted in the previous quarter, which aids external stakeholders in deciding whether or not to keep investing.

Related: How to read financial statements (with types and guides)

Benefits of earnings reports

Earnings reports refer to a document that helps businesses to assess their progress and financial health. It entails gathering important information from income statements and balance sheets and consolidating it in one location. Preparing a financial statement helps a company stay on top of things and discover opportunities for financial growth. Benefits of earnings reports include the following:

Able to compare reports

Companies compare previous reports to much more recent findings by using quarterly reports. This enables businesses to track their financial progress and examine their success. Companies take financial records from an earlier year if they wish to gauge their long-term growth, or they study quarterly data from the previous billing cycle to evaluate their profit development.

Track goals

Earnings reports define goals and monitor performance metrics regularly. Because most businesses create four quarterly reports every year, they find it easier to track their profitability and goals. During one quarter, companies detect flaws with their economic condition, and then establish a target to achieve by the next quarter.

Related: How to track business expenses efficiently: useful tips

Build trust

A duplicate of a company's quarterly report is frequently sent to stakeholders. This increases visibility with stakeholder businesses as it displays a company's financial situation and particular facts regarding sales and profits. Stakeholders sense more trust in a business if they get the financial statement, which leads to more involvement between shareholders and the company.

Attract investors

Businesses distribute earnings reports to stakeholders who are ready to invest in the business. Stakeholders are willing to invest if a company's report demonstrates sustained development and strong profit and sales. Businesses also make their earnings reports available on the internet for potential investors to review while looking for investment possibilities.

Related: How to find investors for a new start-up business

How to calculate earnings reports

Every earnings report includes some legally necessary information. Some businesses prefer to include additional details. A earnings reports include the following information:

1. Net revenue

Companies calculate net revenue by deducting the cost of manufacturing their items from their total sales revenue. Higher sales often suggest greater margins, therefore net revenue refers to a strong measure of a company's profit margins. Net revenue estimates exclude operational expenditures, stakeholders usually need additional information to analyse a company's financial position.

2. Net income

The amount of money a company produces after factoring for all of its operational expenditures, which do not include in its net revenue figure, is net income. Since they consider more aspects than net revenue estimates, net income calculations provide a more holistic perspective of a company's profitability for a specific period. The net income a company generates in a single period has a big influence on how its stock performs once they release their earnings report. A business with a large profit margin becomes more appealing to investors.

3. Number of shares

A company calculates this value by dividing the company's revenue by the shares held by external stakeholders. Following the release of earnings reports, companies that create more revenue per share generally see their stock price rise. This figure impacts novice investors significantly when it comes to determining where to put their money.

4. Dividends

Dividends refer to cash payments made to investors after each quarter. The quarterly results report specifies the sum of dividends per share. This part doesn't appear on every earnings report since not every publicly listed company pays dividends.

Related: How to calculate dividend yield (and why it matters)

5. Note from executives

Some executives prefer to write a letter to go along with the earnings reports to put the data and figures in perspective. The letters to stakeholders serve as a chance for executives to discuss their goals for the future of the company. If the earnings report contains any unfavourable information about a company, the CEO uses the letter to explain the data and clarify their goals for the coming quarter.

Difference between net income and operating income

While both operational income and net income show earnings, the methods look at different areas of the company. Operating income demonstrates a company's ability to operate and produce. Some companies hold a large number of high-interest mortgages that have a detrimental impact on their bottom line.

The company's operations remain extremely successful. Operating revenue allows you and your shareholders to understand how successful the business's core is without having to look at additional sources of income or costs. Conversely, net income depicts the company's entire earnings after deducting all business expenses. This figure aids investors in determining if the company is profitable after paying all bills, fees and taxes.

Why is net operating income important?

Traders use net operating income (NOI) to determine how lucrative a piece of investment real estate is. Shareholders use NOI to assess a property's continuous revenue and gain a better understanding of its prospective profitability in proportion to its operating costs. Since NOI is impossible to falsify, it provides investors with a clear picture of the amount of money a property generates.

The only method to modify your NOI is to reduce your operational costs by raising your rental prices. NOI may also assist an investor in determining how well the company handles a building. You may calculate the operating profit by dividing the anticipated rent by the NOI and then contrasting it with other properties.

Is net operating income and net income the same?

Net income refers to the amount of money left over after deducting all costs for a certain time. You deduct not just operational income but also non-operating expenses when calculating net income. It also covers non-recurring expenses like capital expenditures, which don't factor into the NOI calculation.

Related: 9 essential accounting skills for career success

What's included in net operating income?

The following includes the different components of net operating income:

  • Prospective rental income: The total of all rental revenue for each term, provided the property is completely occupied, is known as prospective rental income (PRI). If the estate isn't completely filled, investors calculate the PRI by comparing similar properties and rental rates.

  • Financial risks and vacancies: This refers to the money lost as a result of tenants failing to pay their rent or vacating the property.

  • Effective rental income: After eliminating the costs of credit losses and property vacancies, you determine effective rental income. Efficient rental income refers to the amount of effective rental income a real estate developer expects to receive in rental payments.

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