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:
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.
Non-operating Revenue: This captures the earnings from peripheral sources, perhaps interest from investments or royalties. For instance, in 2019, Apple's non-operating revenue saw a boost from various investments, contributing billions to its coffers.
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.
An Illustrative Dive: Revenue vs. Earnings
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.
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.
Revenue and Earnings: The Investor's Compass
Both revenue and earnings are indispensable when assessing a company's fiscal wellbeing.
While revenue offers insights into the company's market presence and scale, earnings shed light on its profitability. It's akin to understanding both the breadth and depth of a firm's financial ecosystem.
A pertinent ratio for investors is the comparison of earnings to revenue. Consider two entities: Company A and Company B. If Company A boasts greater revenue but Company B outshines in earnings, it hints at Company B's superior efficiency and profitability. Astute investors frequently employ such metrics to discern the nuances of stock choices.
Revenue and earnings, while interrelated, serve distinct roles in portraying a company’s financial narrative. While revenue illustrates the overall monetary inflow, earnings delve deeper, reflecting profitability after all deductions.
For discerning investors, juxtaposing the two metrics can yield invaluable insights, ensuring informed and judicious investment decisions. Remember, a holistic examination of a company's financials is always the bedrock of a sound investment strategy.
How can earnings be higher than revenue?
It's typically an anomaly for earnings to exceed revenue. However, peculiar circumstances arise. A company may accrue significant non-operating income, such as interest from hefty investments. In 2020, select Fortune 500 finance sector firms reported nearly 12% of earnings from such non-operating sources. Such inflows can, at times, counterbalance the standard expenses, causing net earnings to eclipse the main operating revenue.
Additionally, firms with incredibly high profit margins, like those in the software sector boasting 70-90% margins, might display earnings that feel disproportionately higher than revenue. Furthermore, unique financial windfalls, like a significant asset sale, can momentarily inflate earnings beyond regular revenue.
Are earnings profit or revenue?
Earnings, although in the profit realm, differ subtly from it. Earnings reflect the company's net amount after all deductions from revenue, signifying its net profitability. On the contrary, profit is a broader term: gross profit indicates sales minus the cost of goods, while net profit denotes what's left post all expenses.
In 2019, for context, S&P 500 firms had an average net profit margin of around 10.7%. Revenue is a separate entity, representing the complete sales volume without deductions, offering a glimpse into a company's market activity.
What is revenue vs. earnings?
Revenue, labeled the "top line", showcases the comprehensive sales from primary business operations, hinting at a company's operational scale. Earnings, referred to as the "bottom line", illuminate what remains after all revenue deductions, from operational costs to taxes. McKinsey's report in 2019 offered an illustration: global companies experienced a median 5% revenue growth, yet earnings grew by approximately 7%.
This highlights that elements beyond sales can influence a company's earnings, underlining the importance of distinguishing between revenue and earnings when assessing a firm's financial health.
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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