Revenue vs. Earnings: An Overview
Earnings and revenue are commonly used terms by companies to describe their financial performance over a period of time. Earnings and revenue are two of the most reviewed numbers in a company's financial statements.
Investors and analysts use these numbers to determine a company's profitability and to evaluate a company's investment potential. Here we review the differences between earnings and revenue and show an example of both as presented in an actual financial statement.
- Revenue is the amount of money a company brings in from its business activities, such as from the sales of goods and services.
- Revenue is referred to as "top line" because companies list their revenue at the top of their income statement.
- Revenue is the income a company generates before deducting expenses.
- Earnings, on the other hand, represents the profit a company has earned; it is calculated by subtracting expenses, interest, and taxes from revenue.
- In order to evaluate a company's performance, it's important for investors to take into consideration both revenue and earnings.
Revenue is the total amount of money earned by a company for selling its goods and services. Many analysts use the terms revenue and sales interchangeably. Companies usually report their revenue on a quarterly and annual basis in their financial statements. A company's financial statement includes its balance sheet, income statement, and cash flow statement.
Revenue is called the top line because it sits at the top of a company's income statement, which also refers to a company's gross sales. Revenue is the income generated before expenses are deducted. Revenue is also called net sales for some companies since net sales include any returns of merchandise by customers.
Earnings, by contrast, reflect the bottom line on the income statement and are the profit a company has earned for a period. The earnings figure is listed as net income on the income statement. When investors and analysts speak of a company's earnings, they're talking about the company's net income or the profit.
Effectively managing costs against revenues will determine whether a company will have positive earnings (a profit) or a loss.
Companies calculate their net income or earnings by subtracting from their revenue the costs of doing business, such as depreciation, interest charges paid on loans, general and administrative costs, income taxes, and operating expenses such as rent, utilities, and payroll. A company's bottom line is also called net profit.
Based on revenue alone, a company could appear to be financially successful. A company's management will frequently tout its growing revenue when discussing its future prospects; however, revenue alone does not paint a complete picture of a company's financial health.
We also need to consider the expenses the company incurred to generate its revenue. If the company's revenue is greater than its expenses, it will have a profit. On the other hand, if a company's expenses are greater than its revenue, it's operating at a loss.
While a company's financial statements could show revenues that are growing quarter-over-quarter or year-over-year, the company could still be in financial trouble if its expenses continue to outstrip its revenue. That's why reviewing a company's earnings—which deducts expenses from revenue—is key to evaluating the long-term sustainability of a company.
Revenue vs. Earnings Example
Below is the income statement for Apple Inc. as of the end of the fiscal year in 2021 from the company's 10-K statement.
Apple Inc. (AAPL) posted a net sales number of $366 billion for the period. The company's revenue number represented a 33% top-line growth rate from the same period a year earlier.
After recording revenue, Apple needs to deduct all expenses associated with running the business. This includes deducting from revenue cost of sales, operating expenses, other expenses, and provisions for income taxes.
All these costs reduce revenues to arrive at net income (earnings). Apple posted $95 billion in net income (earnings) for 2021, which was a 65% increase from the same period in 2020.
How Can Earnings Be Higher Than Revenue?
In general, earnings will never be higher than revenue, because revenue represents the total sales made by a company. Earnings represent revenue minus all associated costs; the take-home money for the business. In situations where earnings are higher than revenue, the business received income from another source, usually in a one-off transaction, such as income from a specific investment. This would not be related to operating income.
Are Earnings Profit or Revenue?
Earnings are always profit, never revenue. Revenue represents the value of goods or services a company sold at the retail price. Earnings, also known as profit, represent revenue minus all of the costs associated with running the business: costs of sales and operating expenses, for example.
What Is EPS?
EPS is earnings per share. It is a financial ratio used in investment analysis. EPS is calculated as net profit divided by the number of common shares that a company has outstanding. The number represents how much money a company earns on each share of stock.
The Bottom Line
The difference between revenue and earnings is that while revenue tracks the total amount of money made in sales, earnings reflect the portion of the revenue the company keeps in profit after every expense is paid.
While it's important for investors to review a company's revenue and earnings before making an investment decision, there are other metrics investors can use in their analysis. For example, understanding a few key financial ratios related to a company's profitability, liquidity, solvency, and valuation can help investors quickly pinpoint potential investments.