Legal Definitions - economic earnings

Economic earnings refer to the profit a business generates exclusively from its core, day-to-day operations, before considering non-operating income or expenses, interest payments, or taxes. It provides a clear measure of how efficiently a company's primary activities are performing and creating value.

• Imagine a company that manufactures custom furniture. Its economic earnings would be calculated by taking the revenue from selling its furniture and subtracting all the direct costs associated with making and selling those pieces. This would include the cost of wood, fabric, labor for the craftspeople, rent for the workshop, and salaries for the sales team. It would specifically exclude any income the company might receive from, for example, renting out a spare office space it owns, or the interest it pays on a loan taken to purchase new machinery.

  This example illustrates economic earnings because it focuses solely on the profitability derived from the company's main business: designing, producing, and selling furniture. It strips away financial activities or peripheral income sources to show the true operational success.

• Consider a technology firm that develops and sells a popular mobile application through subscriptions. The firm's economic earnings would encompass the total revenue generated from these subscription fees, minus the expenses directly tied to developing, maintaining, and marketing the app. This would include the salaries of its software engineers, server hosting costs, customer support staff wages, and advertising expenses for the app. It would not include, for instance, the profit made from selling some shares the company held in another startup, or the corporate income tax paid on its overall profit.

  Here, economic earnings highlight the profitability of the company's core product – the mobile app – by isolating the income and expenses directly related to its creation and distribution, providing insight into its operational viability.

• Think about a chain of coffee shops. Their economic earnings would be the total revenue from selling coffee, pastries, and other beverages and food items, minus the costs directly associated with running the shops. This would include the cost of coffee beans, milk, ingredients for pastries, wages for baristas and store managers, rent for the shop locations, and utility bills for the stores. It would not factor in, for example, any interest earned from a savings account the company holds, or the expense of repaying a bank loan used to open a new branch.

  This scenario demonstrates economic earnings by focusing on the financial performance of the coffee shop's primary business activities – serving customers – without being influenced by non-operational financial gains or costs.