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Analyzing companies

Lesson 68 · Written for kid, teen, and little

Earnings — what a company actually keeps

Earnings = revenue minus all the costs. That's what actually belongs to the owners.

The idea

A company's income statement runs top-to-bottom: start with revenue (the value of sales before expenses), subtract every cost (materials, wages, rent, taxes), and the number at the bottom is earnings — sometimes called net income or 'profit'. That bottom-line number is what actually belongs to the owners (or gets reinvested into the business). Cutting prices may bring in more sales, but those sales only produce a profit if revenue exceeds costs. In the long run, stock prices roughly follow earnings — real businesses build real earnings.

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Words to know

5

Revenue

All the money coming in from sales — before any costs are subtracted. A shop selling 1,000 shirts at $20 has $20,000 of revenue.

Cost of goods sold (COGS)

What it cost to make or buy the things you sold — the direct cost of the product. If each $20 shirt cost $8 to make, COGS is $8,000.

Operating expenses

The costs of running the business — rent, salaries, marketing, R&D. The shop pays these whether it sells 10 shirts or 1,000.

Net income / earnings

The bottom line — revenue minus every cost and tax. $20,000 in, $8,000 of COGS and $9,000 of expenses, leaves about $3,000.

Earnings per share (EPS)

Net income divided by shares outstanding. $3,000 of earnings across 1,000 shares is an EPS of $3.

Try it — no accountFind it in the statement

Here's a made-up small-business income statement. Read it top-to-bottom, then answer.

Bloom Coffee Co. — Income Statement · Q1

Which number is what the owners actually KEEP after every cost and tax?

Tap the row that answers the question.

In the full lesson

  1. 1Match the pairs
  2. 2Find it in the statement
  3. 3Make the call

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