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Business Basics

Terminology

Dividends

A cash payment made to investors who own the dividend paying stock. The dividend is the stock holder's share of the company's profit.

Earnings

Earnings is a term used within the stock market and it simply means the company's profits.

Shares Issued

These are the total number of shares that were originally issued by a company.

Shares Outstanding

The shares outstanding are the shares currently owned by stockholders. Some companies repurchase their shares using the company's profits to pay for them, and they do this rather than pay a dividend. Share repurchases reduce the number of shares available, thus increasing the company's equity per share for the remaining stockholders. Hence the shares outstanding are now less than the shares that were originally issued.

The Different types of Earnings

Stock Market Business Basics - The Different types of Earnings; picture of an earnings chart shown on a large wall computer screen with investors studying the charts

Stock investors are often confused with the different types of earnings figures they come across. The various types of company earnings include Reported earnings, Diluted earnings, Restated earnings, Retained earnings, Forecast earnings and Consensus earnings.

There also tends to be some confusion with the difference between Earnings per share, Earnings, Profit and Income.

Basically, Income is a standard term used in accounting, Profit is a term the financial press likes to use and Earnings is a term used within the stock market industry. They are all the same thing and it's the profit made by a company as reported on the income statement.

Earnings per share is simply the company's profit divided by the number of shares outstanding and is often simply referred to as Earnings, thus the confusion since the stock market frequently uses the term Earnings and Earnings per share interchangeably.

When dealing with the stock market, assume that Earnings means Earnings per share.

Reported Earnings

The reported earnings per share is the figure reported in the company's income statement and is first released to the public in the 8-K report. This is the most common profit figure cited by the financial press and is also known as the basic earnings.

Diluted earnings

The reported earnings per share can be distorted when a company has stock options on their books which have not been exercised. These stock options are company issued options which are offered to key employees as part of their remuneration package and are not the same as the stock options which are traded on the options exchanges.

If these company issued options are exercised, then the company issues additional shares to cover the options exercise. The issue this creates for stockholders is that there are now more shares outstanding and the Earnings are now divided by a larger share quantity which lowers the Earnings per share figure (for the same company profit).

Stock Market Business Basics - The Different types of Earnings; picture of earnings data shown on spreadsheet printed out on paper with a blue pen laying on top

Obviously stock investors are not keen on having the company's Earnings per share drop (or dilute). To allow for the possible exercise of company issued options, the Earnings are divided by the shares outstanding which include all the shares that could be made available if all the company issued options were exercised. This is referred to as Diluted earnings per share.

The Diluted earnings per share is a conservative figure since usually not all company issued options are exercised simultaneously but are exercised over a number of years. Also some company issued options are never exercised and expire worthless, which happens if the company's stock price remains below the options strike price.

Dilution also occurs when a company has issued convertible bonds. These bonds can be exchanged for company shares and creates the same issue as with company issued options.

The shares outstanding used to calculate the Diluted Earnings also includes the shares that could be converted from convertible bonds.

Restated earnings

Sometimes the Reported earnings per share are incorrect due to some accounting error or even some deliberant attempt to mislead investors which was discovered by the independent accounting audit. For whatever reason, if the earnings that were reported are incorrect they are released again in an 8-K report and the new released earnings are known as Restated earnings.

Quarterly earnings

Most companies listed on the NYSE or NASDAQ exchanges report their earnings for each quarter in the year. The annual earnings is determined by adding up the four quarterly earnings which the company releases at the end of the fiscal year.

Retained earnings

Whenever a company does not pay out all of its after tax net profit as a dividend, the profit kept by the company is referred to as Retained earnings.

Thus net profit after tax equals dividends paid plus Retained earnings.

The Retained earnings is reported on the stockholders equity section of the balance sheet statement.

Forecast earnings

Forecast earnings per share are future earnings which are estimated by analysts of brokerage firms and other research oriented firms. They usually estimate the earnings for the next fiscal year or two and may provide quarterly earnings estimates.

Not all stocks are covered by analysts and they tend to favor the larger stocks such as those in the S&P 500 index. Smaller stocks are generally only covered if they are attracting significant interest from the financial press, especially the stocks that are significantly increasing in price which are referred to as the market darlings. A lot of analysts are employed by brokerage firms and their role is to drum up interest from the public and thus earn the broker commissions for stock transactions.

Consensus earnings

The Consensus earnings per share are sometimes referred to as Consensus Forecast earnings. The Consensus earnings is simply an average of the Forecast earnings per share obtained from the analysts.

Caution needs to be exercised with Consensus earnings as not all analysts cover all stocks (even for stocks in the S&P 500). Some stocks will have over 20 analysts forecast estimates while others may only have a couple of forecast estimates or even only one.

The forecast estimates from analysts can vary quite considerably. A higher number of analysts provides a broader opinion of a stock's future earnings and is generally considered to be a more reliable figure for the stock's future earnings.

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