What Is the Difference Between Profit and Earnings?
Profits and earnings are often used interchangeably, but they are different. Overall, these terms are primarily differentiated by the adjectives that precede them. For example, net earnings, or gross profit. The term earnings is most commonly used when discussing the bottom line of a company’s income statement. The term profit is commonly associated with the three most important points on the income statement: gross profit, operating profit, and net profit. These items reflect a company’s operational efficiency.
Key Takeaways:
- Profits and earnings are often used interchangeably, but they reflect different items found in the financial statements.
- Gross profit, operating profit, and net profit are three main measures analysts evaluate on an income statement.
- The net earnings are found on the bottom line of an income statement.
- Net earnings show the total earnings a company has achieved after subtracting all expenses.
- The net earnings value carries over into the balance sheet and cash flow statement for a company’s reporting period.
Understanding Profit and Earnings
The term profit may more commonly be associated with the three most important points on the income statement. These items provide checkpoints for a company’s operational efficiency and are the gross profit, operating profit, and net profit. The term earnings can be used interchangeably for any of these measures, but, typically, profit is more commonly associated with the ratio calculations of gross profit margin, operating profit margin, and net profit margin.
Profit
The gross profit margin, operating profit margin, and net profit margin are three key profit measures. Analysts use this data to analyze a company’s income statement and operating activities. The adjectives “gross,” “operating,” and “net” describe three distinctly different profit measures that help to identify the strengths and weaknesses of a company.
Gross Profit
Gross profit, which is used to calculate gross profit margin, is a measure that analyzes a company’s cost of sales efficiency. The costs of sales figures include only direct expenses involved in generating a company’s products. The higher the gross profit and gross profit margin, the more efficiently a company is creating the core products that build its business.
Operating Profit
Operating profit is an analysis of a company’s indirect costs. Operating profit is in the second section of an income statement. The operating profit is calculated by subtracting all of a company’s indirect costs from the gross profit. An analyst can see what types of endeavors a company is taking on to help grow the business from the indirect costs. For example, indirect costs associated with operating profit margin may include marketing campaign expenses, general and administrative costs, and depreciation and amortization. The operating profit margin is calculated by dividing operating profit over sales. This ratio allows an analyst to compare a company’s gross profit efficiency versus operating profit efficiency and to see how direct cost management differs from indirect cost management.
Net Profit
Net profit is calculated from the final section of an income statement. It is the result of operating profit minus interest and taxes, with interest and taxes being the last two factors to influence a company’s total earnings. Net profit is used in the calculation of net profit margin, which gives the final portrayal of how much a company is earning per dollar of sales.
Earnings
Earnings are most commonly associated with a company’s bottom-line results. The bottom line shows how much a company has earned after subtracting all of its expenses. This measure can be referred to as net profit, net earnings, or net income. The net earnings of a company are the earnings after all expenses have been subtracted. Net earnings are then used to calculate a company’s earnings per share (EPS), which portrays a company’s earnings based on the number of publicly traded equity shares it has outstanding.
Overall, earnings are the net value a company has achieved from operating activities for a specific reporting period. Companies also portray their net earnings by dividing it over shares outstanding when identifying the earnings per share (EPS) value.
The net earnings of a company theoretically reflect an accounting value for a specific period. After the net earnings are calculated, this value flows through to the balance sheet and cash flow statement.
On the balance sheet, net earnings are included as retained earnings in the equity section. Retained earnings for the balance sheet are calculated as beginning retained earnings plus net income minus dividends. On the cash flow statement, the net earnings begin the top line of the operating activities section.
Special Considerations
The terms profit and earnings should be evaluated in context. Overall, these terms are primarily differentiated by the adjectives that precede them. For example, net earnings, or gross profit.
Gross profit and operating profit are terms used to analyze the first two segments of a company’s income statement.
The bottom-line, net earnings will have a different connotation. Net earnings can also be expressed as net income or net profit. The net earnings of a company provide the most comprehensive measure of a company’s performance after all expenses are subtracted. Ultimately, net earnings may be the most important number on the income statement because it comprehensively shows the company’s total earnings performance and the value carried over to the balance sheet and cash flow statement.
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