Cash Earnings

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What Is Cash Earnings?

Cash Earnings refer to the money a company makes or generates in cash through its operations, where non-cash items like depreciation and amortization are not considered. It is a company’s actual cash flow, which acts as a measure of its financial health and stability. It is the difference between cash revenue and cash expenses.

Cash earnings are derived from the firm's income statement, accompanied by cash flow footnotes and statements. It represents the hard cash a company makes since it does not account for any non-cash earnings, profits, or expenses. It accounts for the cash generated from its business operations or the sale of products and services.

What Is Cash Earnings?

Cash earnings is the difference between cash expenses and cash revenue generated by a company in a specific time frame.
The metric denotes a company’s cash performance, focusing only on hard cash generated from its operations.
These earnings help stakeholders, analysts, and investors analyze a company’s financial stability, liquidity levels, overall financial position, and growth prospects.
It is an important metric used in conjunction with varied ratios while assessing how well a company is able to perform and accomplish its goals in monetary terms.

Cash Earnings Explained

Cash earnings comprise the total amount of money a company generates in the form of hard cash. It only denotes the amount of money a firm generates in cash through its operations. The various components of such earnings include cash income or revenue from the sale of goods and services, income from investments and assets, income from rent, interest payments on debt that companies have extended to other entities, etc. Income that accumulates in this manner in cash in a given accounting period contributes to a company’s cash reserves. Through such earnings, a company’s financial health can be evaluated.

These earnings reflect a company’s cash performance. Also, it is possible to compute the liquidity a company has at its disposal in a given accounting period. It is an important metric for investors, market analysts, and other stakeholders as it helps them assess a company's financial stability and growth prospects. These earnings only account for sales for which the firm has received payments and expenses that have been paid off in a given accounting period.

It is used to gauge an entity’s performance, and companies need not panic if these earnings are lower than the net income. This is because the level of cash earnings may be low for several valid reasons. For instance, collection issues can be a deterrent to achieving high earnings. This metric helps understand the impact of cash on a company and its operations. Moreover, when a company has significant cash earnings, it allows them to invest in assets or pay off debt.

When analysts study a company’s cash earnings retention ratio, they evaluate how a company utilizes its cash earnings. For example, does a company reinvest its earnings? Another concept that we must pay attention to is residual cash earnings. These earnings refer to the cash flow that remains after an entity pays its operating expenses and meets all its financial commitments, including taxes. Also, to arrive at the true earnings position, the adjusted cash earnings are computed. This involves adjusting the cash flow for any non-recurring expenses. This figure offers stakeholders a more realistic picture of a company’s financial position.

It is important to understand that this metric is typically not employed in isolation while assessing a company’s financial performance and stability. It is used alongside other financial metrics and parameters such as operating cash flow, net income, free cash flow, liquidity ratios, etc.

How To Calculate?

Two methods can be used to calculate cash earnings. When a firm has clear records of cash activity, it can directly use the following formula:

Cash Earnings = Cash Revenue - Cash Expenses

The second approach, however, starts with a company's net income, involves adjusting its non-cash activity and accounting for non-cash expenses and unpaid voices. Based on this, the second formula is:

Cash Earnings = Net Income - Non-Cash Income + Non-Cash Expenses

Examples

In this section, let us study a few examples to understand the concept.

Example #1

Suppose Stella owns a retail shop. In 2023, her annual cash revenue was $90,000. She had cash expenses of $36,000. This money was used to buy another store that would be inaugurated in 2024. She used the cash earnings formula to calculate her earnings.

Cash earnings = Cash Revenue - Cash Expenses

Putting the values in the equation,

Cash earnings = $90,000 - $36,000

= $54,000

If the cash activity was not clear, Stella could use the second formula. Instead of the direct values, if the following values were available, the computation would differ. Let us say the net income of the store is $1,35,000, the non-cash income is $45,000, and the non-cash expenses are $36,000.

Hence,

Cash Earnings = Net Income - Non-Cash Income + Non-Cash Expenses

Putting the values in the equation,

Cash earnings = $1,35,000 - ($45,000 + $36,000)

= $1,35,000 - $81,000

= $54,000

By tracking this figure, Stella can gauge the financial health of her retail business.

Example #2

An August 2023 report about the Insurance Australia Group stated that its cash earnings for 2023 increased by more than double due to the rise in premium payments in New Zealand and Australia. As the actual company performance differed from the predicted or expected numbers, IAG’s share price dropped by 1.2% in early trade. IAG, Australia's top general insurance company, reached a record cash earnings number, adding up to Australian Dollars (AUD) 453 million as of June 30.

Market analysts had estimated earnings of approximately AUD 656.7 million. They had also estimated a higher dividend percentage than the ones declared by the company. IAG declared a final dividend of 9 Australian cents per share, which is higher than the previous year by 5 cents per share but lower than the expected number.

Cash Earnings vs Cash Flow

Both cash earnings and cash flow act as key metrics for a company, indicating its financial performance. Even though they measure the same parameter (cash), they are not the same. Here are the differences between them.

Key Points	Cash Earnings	Cash Flow
Definition	It represents the money a company generates through its operations where non-cash items are excluded.	It represents all the cash flowing in and out of a business, covering cash from operating, investing, and financing activities.
Focus	It focuses on the hard cash generated from business operations.	It focuses on cash generated through investing, financing, and operating activities.
Formula	Cash Revenue - Cash Expenses	All cash inflows and outflows from operating, investing, and financing activities must be added or subtracted, depending on computation requirements.
Use in financial assessments	It is a simple metric that indicates the financial stability of a firm. It must be used in conjunction with other metrics like the cash flow.	It is a comprehensive metric to measure a company’s financial health since it considers all business activities.
Timeframe	It can be computed and assessed for short accounting periods, such as a quarter.	It is typically studied over long accounting periods, such as a financial year or multiple financial years.

Frequently Asked Questions (FAQs)

What is cash earnings per share?

Cash earnings per share or EPS is the ratio of a company's operating cash flow to its diluted outstanding shares. It measures the portion or figure of a company's cash flow that can be allocated to individual shares of stock. A firm with a higher cash EPS is expected to deliver a better financial performance than the one with a lower EPS. This is attributable to its increased ability to generate cash flow. This measure is used for competitive comparisons between companies.

What is the difference between profit and cash earnings?

Profit is defined as the revenue minus all expenses a company incurs for a specific period. At the same time, cash earnings only account for the cash generated by a firm through its operating activities. Profits can come from different sources and assets, but cash earnings only count a company’s cash performance by measuring hard cash inflows and outflows.

What is the quality of cash earnings?

The quality of such earnings is determined by how sustainable the cash generated by a company is in a given period. When companies generate cash primarily through core business operations and are not dependent on non-recurring or one-time items for cash generation, their financial position is stronger than entities that rely on one-time items. Such companies' potential for growth is high since they are able to generate cash from direct sales instead of investments or other activities.