Net EarningsFinancial Statements
This section includes and deducts costs that weren’t associated with manufacturing or with company operations. These usually are financing and asset costs. It’s recorded in this section if a company took a loan for expansions, productions, or had a gain/loss on an asset or investment sale. Taxes are also deducted from earnings in this section. The leftover profit is retained as “net earnings”. You want to see net earnings increasing over time as both a raw value and a percentage of net earnings.
Earnings before Interest and Taxes
Earnings before Interest and Taxes, also known as EBIT, are the total earnings before taxes or interest payments to creditors are subtracted from earnings. You can use this number to compare firms before their values are disrupted by interest or taxation.
Interest expenses list the cost of interest paid on debts owed from the balance sheet. This cost has no relation to actual company operations. Interest Expense is a fiscal cost generated from the accumulation of debt and reflective of liability levels actually carried on the balance sheet. The higher the company’s debt the more money they are forced to pay. Strong companies can self-finance themselves via retained earnings, and generally, don’t have to pay high-interest rates as a percentage of revenue costs. They’ll have less than or close to only ten percent of their costs be interest expenses since they bring in high revenue and keep Operating and SGA costs low, which allows them to consistently reinvest profits into their business. Weak companies must constantly reach out to external sources for financing, finding either outside investors to buy into the company, or taking out large amounts of loans which result in interest expenses constantly rising. The higher the interest expense, the more likely a company will simply run out of money when the rough patches hit. You should avoid companies with high-income expenses. The debt and interest costs will depress earnings during good times, and create losses in bad times.
Gain/Loss on Sale of Assets
Gain or Loss on Sale of Assets records the changes in the value of assets that are being sold by the company. If an asset is bought and decreases in value after purchase (after subtracting depreciation if applicable), there is a loss. If an asset is purchased and increases in value after purchase (after subtracting depreciation if applicable), there is a gain. Gain/Loss on sales of assets highlights a very important potential problem for companies. If this is regularly a loss, or minimal in gains compared to other competitors, this firm is bad at investing for future profits. You should prefer investing in firms that have strong regular gains on sales of assets.
“Other” represents the most infrequent, unexpected, one-time, and unusual of charges for business. This could include sales of fixed assets, divisions, subsidiaries, or copyrights and patents. Many times these are not expected sources of income or expense. They often distort business figures and should be canceled out. If the figure is a loss, add it back. If the figure is a gain, subtract it out. This will help an investor arrive at the true figure for business earnings.
Income before Taxes
Income Before taxes represents the company’s income without the effect of taxation on their record. This figure shows companies compare before their relevant tax structures take effect on their earnings. It essentially is the last place on the income statement to see a company’s real return after canceling out the “Other” figure.
Taxation/Income Taxes Paid
Taxation lists the total amount a company has paid to the government as a requirement. Any company in operation will be forced to pay business taxation on its income. The tax rate generally ranges between 25% and 50% depending on the nation of operation. Depending on exclusions and tax breaks this number may be strongly decreased.
Net Earnings are the profit of the company after expenses, interest, and taxation. This is essentially the final line of the company’s profit and indicates how much they actually made, but not what was kept by the company due to share repurchase programs and dividends. You must ensure the company you are investing in has net earnings increasing steadily year over year. It is always better to find a company with steadily increasing net earnings over firms which rise and fall each year. If considering net earnings, ensure upwards stability.
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