Revenue vs. Earnings: The Difference Explained

In the realm of finance and accounting, revenue and earnings are the cornerstones of assessing a company's financial health. Grasping these concepts is vital, especially when delving into financial statements, an investor's primary tool for gauging a company’s worthiness as an investment.

This article elucidates the subtle distinctions between the two, enhancing your financial literacy.

What Is Revenue?

Revenue, commonly referred to as "the top line," encapsulates the total money a company accrues from its business activities. This includes sales of products or services and other non-core activities. For example, companies in the S&P 500 have seen an average year-over-year revenue growth rate of around 10%.

There are two primary facets of revenue:

1. Operating Revenue: This pertains to the money accrued from a company's core business operations. If Apple sells an iPhone, the proceeds contribute to its operating revenue.

2. Non-operating Revenue: This captures the earnings from peripheral sources, perhaps interest from investments or royalties.

What Are Earnings?

Termed as "the bottom line," earnings represent what remains after all expenses, taxes, and other costs are deducted from revenue. It’s an indicator of a company’s profitability.

On the income statement, you'll encounter varied representations of earnings:

• EBT: Earnings before tax.

• EBIT: Earnings before interest and taxes.

• EBITDA: Earnings before interest, taxes, depreciation, and amortization.

• EPS: Earnings per share, derived by dividing net profit by outstanding shares.

Earnings, before any deductions, are labeled as "gross income." Once all deductions, including taxes, are factored in, we get the "net income."

Earnings trends can also hint at a company's trajectory. Rising earnings often suggest robust demand for the company's offerings, potentially heralding future growth.

In contrast, stagnant or diminishing earnings might flag challenges in maintaining market competitiveness.

A Quick Example

Consider Company A, a renowned widget manufacturer. Last year, it amassed $100 million from widget sales and an additional $10 million as interest from investments, resulting in a total revenue of $110 million.

From this:

• Costs of Goods Sold (COGS) consumed $60 million.

• Selling, General & Administrative expenses (SG&A) took another $20 million.

• Interest expenses amounted to $10 million.

After these deductions, an operating profit of $20 million remained. Post-tax deductions, net earnings stood at $15 million.

Here, Company A’s revenue was $110 million, encompassing both its operating ($100 million) and non-operating revenue ($10 million).

In contrast, its earnings, after accounting for all expenditures, were a modest $15 million.