What Does Net Earnings Mean?
For businesses, the definition of net earnings is the amount of sales revenue left over after all operating expenses, interest, taxes, and preferred stock dividends (not common stock dividends) are deducted from a company's total revenue.
For individuals, this is the amount earned after deducting taxes (and other exemptions) from their gross income.
Net earnings is also synonymous with net income, net profit, and the bottom line.
What You Should Know About Net Earnings
Net earnings are not a measure of how much cash a company earned during a given period. This is because the income statement includes many non-cash expenses (such as depreciation and amortization).
Note: To learn about how much cash a company generates, you’ll likely need to examine the cash flow statement.
Why Do Net Earnings Matter?
Net earnings are one of the most closely followed numbers in finance, and this concept plays a major role in financial ratio analysis and financial statement analysis. Shareholders review net earnings closely because they are the source of compensation to shareholders of the company. If a company cannot generate enough profit to compensate its owners, the value of shares will plummet. Conversely, if a company is healthy and growing, higher stock prices will reflect the increased availability of profits.
Net Earnings Formula
Net earnings are found on the last line of the income statement, which is why it's often referred to as the bottom line.
Let's look at a net earnings example for Company XYZ’s income statement:
By using the formula we can see that Company XYZ’s total net earnings = $100,000 - $20,000 - $30,000, - $10,000 - $10,000 = $30,000
What Do Changes in Net Earnings Mean?
Generally, when a company's net earnings are low or negative, a myriad of problems could be to blame, ranging from decreasing sales to poor customer experience to inadequate expense management.
Ratios Related to Net Earnings
Net earnings vary greatly from company to company and from industry to industry. It’s often more appropriate to consider net earnings as a percentage of sales (known as 'profit margin').
Another common ratio is the price-to-earnings ratio (P/E), which tells investors how much they are paying (the stock's price) for each dollar of net earnings the company is able to generate.