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.
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.
How can earnings be higher than revenue?
Generally speaking, earnings cannot be higher than revenue. However, there are a few exceptions to this rule. For example, a company can have a significant non-operating income, such as interest income from investments. This can offset any costs or expenses incurred, resulting in net earnings that are higher than operating revenue.
A company can also have a high margin of profit, meaning that it generates a lot of revenue relative to its costs and expenses. This can also lead to earnings that are higher than revenue. Finally, if a company has significant one-time items that positively impact earnings, such as gains from the sale of an asset, this can also result in earnings being higher than revenue.
Are earnings profit or revenue?
In the earning vs. profit debate, earnings represent the total amount of money a company has left after taxes and other deductions have been made. This is different from profit, which is the total amount of money a company makes before taxes and other deductions are taken out.
While both earnings and profit are important financial metrics, they serve different purposes. Earnings give you an indication of a company’s overall profitability, while profit gives you an indication of a company’s financial health.
What is revenue vs. earnings?
Revenue is the total amount of money a company brings in from sales. Earnings refer to the total amount of money a company has left after taxes, other operating expenses, and deductions have been made.
Revenue is often referred to as the top line, while earnings are referred to as the bottom line on the income statement. Both are essential in making investment decisions.
It is important to look at both revenue and earnings when comparing companies, as they give you a complete picture of each company’s financial performance. Revenue vs. earnings is often a point of confusion for many people as the two terms are often used interchangeably when in fact, they are two very different things.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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