What are Business earnings, how they are computed?

As we all know, earnings is basically net income after tax or bottom line which determines a business entity’s share price. The earnings of a business entity also provide financial analyst certain yard stick to evaluate the financial condition and performance of a business. The earnings also reflect whether actual performance is good to the set in goal prevailing circumstance. The comprehensive and up-to-date information on earnings is also needed to an analyst in risk assessment and credit evaluation, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run. The main items draw attention of analysts in a profit and loss account for a particular period (usually both on quarterly and annual basis) are total income, total operating expenses, Operating profit before provisions, Net operating profit, net profit, Profit before tax (PBT), Retained earnings, Average Yield, Average Cost, Return on Asset (ROA) after tax, Return on Equity (ROE) after tax, Accretion to equity, Net Non-Interest Income, Net Interest Income, Net Interest Margin, Cost income ratio (Efficiency ratio) etc. Let us now look at each of the above.

Total income: Total income is the sum of income earned by an individual or business entity in the form of interest/ discount earned, commission, exchange, brokerage and any other operating income earned for a particular period (Which will be coincided with the period of balance sheet.

Total operating expenses: Total operating expenses is the expenses incurred by an entity for carrying out day to day activities but not directly associated with the production. Operating expenses includes interest paid, staff expenses, sales commissions, transportation, amortization, depreciation, rent, repair, taxes, and other overheads

Operating profit before provisions:  Operating profit before provisions is the amount of income a bank or financial institutions earns in a given time period, before taking into account funds set aside to provide for future bad debts

Net operating profit:  Net operating profit is the operating profit before provisions minus provision for loan losses, depreciation in investments, write off and other provisions. In the other words Net operating profit is earnings before interest and taxes (EBIT) adjusted for the impact taxes.

Net Profit: Net Profit is the net of all expenses, interest, and taxes

Profit before tax (PBT): Profit before tax= Net operating profit +/- realized gains/losses on sale of assets

Profit after tax (PAT): Profit after tax = Profit before tax – provision for tax.

Retained earnings: Retained earnings =Profit after tax – dividend paid or proposed.

Average Yield: Average yield is the sum of all interest, dividends or other income that the investment generates, divided by average interest earning assets

Average yield = (Interest and discount earned/average interest earning assets)×100

Average cost: Average cost=(Interest expended on deposits and borrowings/Average interest bearing liabilities)×100

Return on Asset (ROA) after tax: Return on asset after tax is after-tax income earned by a company from its total assets. It is a profitability ratio which indicates the net profit (net income) generated on total assets. It is computed by dividing net income by average total assets.

Formula: Return on Asset (ROA) after tax = (Profit after tax/Average Total assets)×100

Return on equity (ROE)- After Tax: Return on Equity (ROE) is a ratio relating net profit (net income) to shareholders’ average equity. Here the equity refers to share capital reserves and surplus of the bank.

Formula: {Profit after tax ÷(Total equity + Total equity at the end of previous year)÷2}×100

Accretion to equity: Accretion to equity is the ratio relating to retained earnings to total equity at the end of previous year.

Formula: Accretion to equity= (Retained earnings/Total equity at the end of previous year) ×100

Net Non-Interest Income: Non-interest income is basically fee based income like commission, locker rent, service charges etc. The net non- interest income is the difference between non- interest income and non-interest expenses as percentage to average total assets.

Formula: Net Non-Interest Income= the differential (surplus or deficit) between non-interest income and non-interest expenses as a percentage to average total assets.

Net Interest Income (NII): The NII is the difference between the interest income and the interest expenses.

Net Interest Margin: Net interest margin is the net interest income divided by average interest earning assets.

Cost income ratio (Efficiency ratio):

Cost income ratio shows an organization’s costs in relation to its income. To get the ratio, divide the non-interest expenses (administrative and fixed costs, such as salaries and property expenses, but not bad debts that have been written off) by operating income. The cost income ratio reflects the extent to which non-interest expenses of a bank make a charge on the net total income (total income – interest expense). The lower the ratio, the more efficient is the bank.

Formula: (Non interest expenditure / Net Total Income) × 100.

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