Talking Finance - Earning a living

“How much did you earn last year?” — “About twice as much as I actually got paid.”

This joke is based on a play on words because the verb “earn” has different but related meanings. On the one hand, if we ask someone what they earn, we are normally referring to how much they get paid — per hour, week, month or year. On the other hand, to “earn something” means to “deserve it through your behaviour”. So what people get paid might not always be what they deserve.

We also talk about “earning a (good) living” or, more informally, “earning a crust” in British English, or “earning one’s daily bread”. And somebody’s “earning potential” is the maximum amount of money they could expect to receive.

We can also earn, among other things, admiration, affection, a good reputation, a promotion, a reprieve, respect, a second chance, or simply a break, rest, holiday or a drink.

The word “earnings” means different things, depending on whether we are referring to personal or corporate finances. When talking about our personal finances, “earnings” typically refer to our salary or wage, although we can also earn non-work forms of income, such as interest, dividends or rental income. Our ex- penses/outgoings play no role in the calculation of our earnings.

In terms of company finances, as the website Investopedia.com says, “‘earnings’ typically refer to after-tax net income, sometimes known as the ‘bottom line’, or a company’s ‘profits’”. So a company’s earnings are a measure of its profits, the diffe​- rence between revenues and costs. We talk about a company “earning profits”, meaning that they generate them — though, again, whether these profits are always deserved is another matter.

Earnings — both actual and expected — are one of the factors that determine a company’s share price and therefore stock market indexes more generally. This explains why the word “earnings” appears so often in financial headlines, as in this example from The Wall Street Journal: “Earnings Help Dow Break Losing Streak” (Meaning: Strong profits have helped the Dow Jones Industrial Average index to stop falling)

One measure of a company’s valuation is its “price-earnings” (P/E) ratio, which compares the share price with the earnings per share (EPS). This shows how much an investor has to pay to acquire a unit of the company’s profits. A very high P/E ratio — also known as the “price multiple” — can be an indicator that rapid growth is expected by investors, who are willing to pay a high price to buy the company’s share.

And after all this financial talk, we’ve all earned a bit of a rest — and I’ve earned a cup of tea.