Expert: Paul Henneman - 1/29/2006

Question
Hello:

I want to thank you for the generous reply and the information you provided. I do have a follow-up question:
Is there a difference between earnings and profits?  The earnings of a company seem to be important when selecting a stock.

I thank you for your follow-up reply.
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Followup To
Question -
Hello:

Are earnings, revenues, and net income the same?
Do these terms also refer to the profits of a company?

I thank you for any helpful reply that you may return to me.
Answer -
Thank you for your question!

Generally earnings and revenues are not entirely the same thing as net income. There are other categories that could result in additional income than just earnings and revenues. But those do usually account for the majority of net income. The simple way to think about it is that net income includes every source of income, while earnings and revenues are two categories of income.
These terms do not refer to the profits of the company, that would depend upon expenses. If net income is less than expenses, then the company is losing money.
I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service.

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
www.VEReports.com


Answer
Thank you for your follow up question! Yes, earnings and profits are generally the same thing. Usually earnings are referred to before taxes. A good definition is in Barrons "Dictionary of Finance and Investment Terms" on page 168:
Earnings Before Taxes are "corporate profits after interest has been paid to bondholders, but before taxes have been paid".
You are right that earnings are perhaps the most important thing that investors look for. But more important than the actual earnings (profit) figure is the pattern. A company could be very profitable, but this profit could be shrinking over the past few quarters, or even years. This would generally cause the stock price to fall.
Also, even if a company has earnings that continue to grow, this is usually already built into the stock price. THere are millions of other investors tracking this, so you have to look for specific opportunities. For example, if you are tracking a company closely, you may begin to get a feel for if they are going to beat earnings expectations in the near future.  This is another reason stock price is often most affected immediately following earnings announcements by a company. Lots of investors are waiting to find out what the future prospects are, a good quarterly earnings report gives a bump up in price, and a bad one a bump down. The degree of the bump of course varies. And you do want to invest this way, you have to be very fast and plugged into media sources where you can find the earnings report right away when it is released.
I hope this helps! Please do not hesitate to follow up with me if I can be of any further service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
www.VEReports.com