Gross Earnings vs. Net Earnings

Breaking down the difference between these two important investing terms.

Oct 29, 2015 at 7:08PM

Spend enough time reading financial news or corporate annual reports and you're bound to come across the term "gross earnings," which can also be expressed as "gross income" or "gross profit." The figure is important because it's the starting point for many financial calculations. And whether it's describing earnings at a multinational corporation or your own personal salary, "gross earnings" differs from "net earnings" in exactly the same way.

When used as a financial adjective, "gross" simply means "without deduction," or "total." And so the term "gross earnings" refers to all of an entity's income. For a person, that means your total salary before any of the common deductions like taxes and retirement contributions are removed.

For a company, gross earnings is often found on the third line on the income statement. The first line is usually sales, or revenue. The second line is usually some form of cost for that revenue, or "cost of goods sold." Subtract cost of goods sold from sales and you have calculated gross earnings. Then you just make the appropriate deductions to arrive at net earnings.

Let's look at a real-world example.

Coca-Cola sells a lot of beverages -- 1.9 billion drink servings per day, to be exact. And those sales generated $46 billion of revenue in 2014.

Ko Machines

Image source: Coca-Cola.

But the genius of Coke's business model involves the fact that its products aren't expensive to manufacture. Cost of sales in 2014 was a relatively tiny $18 billion. So, Coke's gross profit in that period was $46 billion minus $18 billion, or $28 billion.

From there, it's only a tiny step to another critical investing figure: gross profit margin. Simply divide gross profit by revenue to arrive at that result ($28 billion divided by $46 billion in this case, or 61%). Coke's 61% gross margin makes it one of the most profitable companies on the planet.

Yet Coke's costs go far beyond just manufacturing expenses. The soda king has to market those products by spending billions of dollars on advertising. It also has to pay the salaries of its army of sales employees. And it has to pay taxes. After deducting expenses like those, Coke had $7.1 billion of "net income" left in 2014. Again, we can divide that number by the sales figure to arrive at a (still healthy) net profit margin of 15%.

We now have loads of information about Coke's business, just thanks to these few figures. We know it has incredible pricing power because it can sell its products at a substantial premium to their cost of production. And we know that, after distributors, employees, and ad agencies get their respective cuts, net earnings, the bottom line for shareholders, is an impressive double-digits.

The $15,978 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus. Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us at knowledgecenter@fool.com. Thanks -- and Fool on!

the_motley_fool has no position in any stocks mentioned. Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and has the following options on it: long January 2016 $37 calls, short January 2016 $43 calls, and short January 2016 $37 puts. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers