Revenue vs. Earnings: The Difference Explained

In the world of accounting and finance, revenue and earnings are the two key metrics of a company’s performance. To correctly read financial statements - the key resource for investors evaluating a company’s investment potential, it is necessary to understand the revenue vs. earnings distinction. 

In this article, we’ll walk you through the definitions of the terms and explain the key facts that set the two concepts apart.

What Is Revenue?

Total revenue includes the money a company earns from sales of goods or services, as well as the proceeds of any non-core activities. This figure is important because it serves as an indication of how much a company is making and how well it is doing. Revenue can be divided into two main categories: operating revenue and non-operating revenue.

According to the operating revenue definition, it is the money a company makes from its core business - more specifically, from selling its products or services. Non-operating revenue is the money a company earns from other sources, such as interest on investments or rental income from a property.

As the company’s revenue is often the first figure reported in the income statement, it is often referred to as “the top line.” And since earnings are often reported as the last figure on the company’s income statement, they are also called “the bottom line.”

What Are Earnings?

To understand what the difference between revenue and earnings is, let’s define earnings. Earnings are the net amount a company gets from sales and other sources of revenue minus taxes and operating expenses.

On the income statement, earnings can be itemized in categories including EBT (earnings before tax), EBIT (earnings before interest and taxes), and EBITDA (earnings before interest, taxes, depreciation, and amortization). Earnings measures also include EPS (earnings per share), obtained when net profit is divided by the number of outstanding common shares.

Earnings without any deductions are called “gross income,” while earnings after taxes and other deductions are called “net income.”

When we speak about revenue vs. earnings, we should mention that earnings can also be a good indicator of future growth potential. For example, if a company’s earnings are increasing, it may be due to strong demand for its products or services. This could lead to further growth in the future.

Conversely, if the company generates flat or declining earnings, it could be a sign it is struggling to compete in its industry. Therefore, earnings can be a valuable tool for investors when making decisions about which stocks to buy or sell.

Examples of Revenue and Earnings

Let's look at a real-life example to better understand the difference between revenue vs. earnings.

Company A is a manufacturer of Widgets. In its most recent financial year, it generated $100 million in sales from Widget sales. It also received $10 million in interest income from its investments. Its total revenue for the year was $110 million.

From this revenue, the company incurred $60 million in costs of goods sold (COGS), $20 million in selling, general and administrative expenses (SG&A), and $10 million in interest expenses, while it reported no non-operating expenses. This left the company with an operating profit of $20 million. After taking into account taxes, the company’s net earnings were $15 million.

In this example, we can see that Company A’s revenue was $110 million. This figure includes both operating revenue ($100 million) and non-operating revenue ($10 million). Now, what is the revenue compared to earnings? Company A’s earnings were $15 million, which is lower than its revenue because it incurred costs and expenses that reduced its overall profit.

Earnings and Revenue as Financial Metrics

When you want to check your company’s financial health and calculate the operating income, you will look at the revenue and earnings. These two metrics are essential in measuring a company’s profitability and performance over time. 

Revenue can give you an indication of a company’s overall size and scale. On the other hand, earnings are a metric that tells you how much profit a company is making. When comparing companies, it is important to look at both revenue and earnings and the financial ratio between the two. 

For example, let’s check the revenue vs. profit ratio in Companies A and B. If Company A has higher revenue than Company B, but Company B has higher earnings, this could mean that Company B is more efficient and profitable. Investors often use these metrics to make decisions about which company’s shares of stock to buy or sell.

Final Thoughts

Revenue and earnings are two important financial metrics that give you an indication of a company’s overall size and profitability. Revenue is the total amount of money that a company brings in from sales, while earnings refer to the total amount of money that a company has left after taxes and other deductions have been made. 

When comparing companies, it is important to check the earnings vs. revenue ratio often and look at both aspects to get a complete picture of each company’s financial health.