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 is 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.
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.
The Importance of Revenue and Earnings
Based on revenue alone, a company could appear to be financially successful. A company's management will frequently tout their 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.
Apple Inc. Example
Below is the income statement for Apple Inc. as of the end of the fiscal year in 2017 from the company's 10-K statement.
Apple Inc. (AAPL) posted a net sales number of $229 billion for the period. The company's revenue number represented a 6.3% top-line growth rate from the same period a year earlier.
Apple posted $48.35 billion in net income or earnings which was a 5.8% increase from the same period in 2016.
Remember, net income (earnings) is a smaller number than revenue because net income is the result of total revenue minus all of the costs or expenses for the period.
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.