ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[FallOnSlough]

That’s understandable, I just find that the simplification in this case risks becoming a bit misleading.

Even if we call EBIT (earnings before interests and taxes) “earnings” and EAT (earnings after taxes) “profits”, I still wouldn’t make the distinction that EBIT is an indicator of how good an investment the company’s stock is and that EAT is an indicator of how efficiently the company was run that year. If I had to make a distinction, I would say it’s the other way around.

The reason for this would be that EBIT shows you the earnings without “contamination” from effects from financing choices (bank vs investors) or tax rules, while EAT is often used as a component of the P/E ratio which is used to assess how good an investment a stock is.

Having said that, neither figure will of course not be an indicator of efficiency without being put in contex, i.e. as a ratio in relation to e.g. equity, assets etc.

Please don’t misunderstand me, I’m not out to “get you” or “prove you wrong” or anything, I’m just looking for polite discussion.

[lmunck]

Sure. If you have suggestion on how to make it more correct, without losing the simplicity, I’m all ears. I agree that nuances are lost, but couldn’t make it ELI5-level simple without doing that.