Net Earnings

The company’s revenues less all expenses, depreciation, taxes and amortization is the net earnings. The net earnings is also known as the net profit.

Complementing the study of net earnings and EBITDA 

Negative net earnings are not necessarily a bad thing. Negative net earnings may mean that there are high depreciation rates and high amortization. This is also the reason EBITDA figures should also be relied on.

Price Direction Of Underlying Security

The underlying security’s price will generally move as net earnings increase. That means that if an options trader can forecast net earnings, and he has an understanding of the business, then, he has an edge compared to other traders.

Example Of Net Earnings

The net earnings can be found on the line “net income” in Apple Inc’s annual report or 10K as you can see above here. It can be found just above the earnings per share figures.

Study Net Earnings Over A Period of 5 to 10 Years

The  idea really  is to analyse the net earnings over several years. Investors who take a serious fundamental view tend to look at 5 to 10 years of annual reports, studying net earnings figures. If net earnings tend to be reliable and consistent going back historically, chances are that they will be fairly consistent going forward as well into the future.

However if net earnings are volatile over the last 5 to 10 years, that speaks volumes about the value of the business. Businesses like that tend to have volatile share prices as well. And did you know that option traders can profit from volatility? Yes, option traders can profit from volatility.  You can refer to a strategy called “Long Guts” by way of example.

Last but not least, you would have to complement net earnings analysis with free cash flow analysis. Because of movements in working capital and capital expenditures, positive net earnings, net income may not mean a healthy business. In fact, that because generating positive net earnings could very well be burning cash! For more, look at the free cash flow section of this website!


Read : Dividends