Hi community,
I’m a bit confused about the terms “earnings,” “profit,” and “revenue” in the context of business, especially after reading some financial news. Can someone help break it down for me in simple terms?
From what I understand, revenue is the total money a company makes, profit is what’s left after expenses, and earnings seem to be used interchangeably with both. But I’m not entirely sure.
Here’s a snippet from a news article that adds to my confusion:
“JPMorgan Chase reported a 15% annual drop in Q4 earnings – largely due to a $2.9 billion FDIC rescue fee – but closed out its most profitable year on record.”
If earnings include profit, how can there be a drop in earnings but still have the most profitable year?
Also in what situations is earnings used as profit and in what context does earnings mean revenue?
I appreciate any help in sorting out this confusion. Thanks in advance!
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It’s indeed pretty complicated in the case of financial businesses since to normal rational logic the idea of making money just by moving it around is… questionable. However, In this case “Earnings” can be thought of as the money brought in through the primary business of return on investment. “Revenue” is the money the company itself made, including the earnings on investments the corporation itself holds, fees paid by its customers and etc while “Profit” means the net positive value. So in this case, since they had to pay off the FDIC for “rescuing” them that fee came “off the top” and cut into their fundamental earnings – but because the “rescue” altered the market in a way that benefitted them, they still came out ahead on the bottom line.
Make of this what you will…
Revenue is how much money you bring in. Profit and Earnings are more or less interchaneable, and refer to revenue minus expenses. There’s some conventions in terms of where “profit” versus “earnings” are used, but they more or less mean the same thing.
Revenue is the amount you gain before accounting for expenses like COGS (cost of goods sold). It’s also sometimes referred to as gross profit.
Profit is the amount earned after accounting for expenses. It’s often referred to as net profit. Profit is purely new money you gained from selling a good or performing a service.
Earnings is another way of saying net profit.
To answer the snippet, it’s saying that JPMorgan made 15% less money in the 4th quarter of their fiscal year compared to the previous quarter, yet was still able to earn an overall profit for the year.
Earnings are almost always used interchangeably with profit. (ELI5) Revenue is the total amount of sales (broadly speaking money coming in). Profit/Earnings is revenue minus costs.
A year consists of 4 quarters. So JPM made a LOT of money in Q1, Q2 and Q3. It didn’t make as much in Q4 (compared to Q4 last year) but the sum for the year ie Q1+Q2+Q3+Q4 still made it the most profitable YEAR on record. There is nothing inconsistent about the statement.
In the example you cited, the Q4 earnings (aka profit) went down, but since the rest of the year was good, the profit for the entire year was a record.
Imagine you run a lemonade stand and you spent $20 on materials and ingredients. At the end of the day you have $100 from seeking lemonade.
$100 = revenue
$100 – $20 = $80 = profit.
Then you come back tomorrow and spend another $10 to refill some ingredients. On the second day you only make $95 selling lemonade.
So $95 = revenue
$95-$10 = $85 = profit.
So on day 2 you earned less revenue but also had fewer expenses, allowing more profit.
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