May 21, 2024

Overview of Revenue vs. Earnings

Companies frequently use earnings and sales to characterize their long-term financial performance. Two of the most closely examined figures in a company’s financial filings are earnings and sales.

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These figures are used by analysts and investors to assess a company’s investment potential as well as its profitability. In this section, we go over the distinctions between revenue and earnings and provide an example of each from a real financial statement.

Revenue

The total amount of money that a business makes from the sale of its products and services is known as revenue. Sales and revenue are frequently used interchangeably by analysts. In their financial accounts, businesses often disclose their revenue on a quarterly and annual basis. The balance sheet, income statement, and cash flow statement are all parts of a company’s financial statement.

Because revenue, which also refers to a company’s total sales, appears at the top of an income statement, it is known as the top line. Before expenditures are subtracted, revenue is the amount of money earned. For certain businesses, revenue is also referred to as net sales since net sales include any consumer returns of goods.

Profits

In contrast, earnings represent the company’s profit for a certain time and are displayed at the bottom of the income statement. The income statement shows the earnings amount as net income. When analysts and investors discuss a company’s profits, they are referring to its net income or profit.

Businesses deduct operational costs including rent, utilities, wages, depreciation, interest paid on loans, general and administrative expenditures, income taxes, and other business-related costs from revenue to determine their net income or profits. Net profit is another term for a company’s bottom line.

Noteworthy Information

A corporation may appear to be financially successful based only on its revenue. When addressing future possibilities, management of a firm will often highlight its increasing revenue; nevertheless, revenue does not provide a clear picture of a company’s financial health.

We must also take into account the costs the business expended in order to make its money. The business will turn a profit if its income exceeds its costs. In contrast, a business is running at a loss if its costs exceed its revenue.

Even if a company’s revenue is increasing year over year or from quarter to quarter, if costs keep rising higher than income, the business may still be in financial difficulties. For this reason, an essential step in assessing a company’s long-term viability is to go at its earnings, which are obtained by subtracting costs from revenue.

Example of Revenue versus Earnings

The income statement for Apple Inc. from the company’s 10-K form as at the conclusion of the fiscal year in 2022 is shown below.

In comparison to the same period last year, Apple Inc. (AAPL) reported net sales of $394,328 billion for the quarter, an increase of over $28 billion.

All business-related expenditures must be subtracted by Apple before declaring income. This entails subtracting operational costs, other expenditures, cost of sales, and income tax provisions from revenue.

All of these expenses lower revenue, which results in net income (profits). Apple reported net income (profits) of $99,803 billion for 2022, an increase of $5 billion over the same time in 2021.

How Is It Possible for Earnings to Exceed Revenue?

Generally speaking, since revenue is an indication of a company’s entire sales, profits will never exceed revenue. Profits are the take-home money for the company, calculated as revenue less all related expenses. In instances where profits exceed revenue, the company likely obtained more revenue from a one-time transaction or another source, such an investment. Operating income would not be relevant to this.

Is Revenue or Earnings Profit?

Earnings are never revenue—they are always profit. The value of the products or services a business sells at retail is represented by revenue. Profit, often referred to as earnings, is the total income less all operational and sales costs incurred by the company.

What Does EPS Mean?

Earnings per share is EPS. This financial ratio is employed in the examination of investments. Net profit divided by the total number of outstanding common shares of a corporation is how earnings per share (EPS) is determined. The figure shows the profit a business makes on each share of equity.

The Final Word

Revenue and earnings are two different things. Revenue is the whole amount of money that a business makes from sales, whereas earnings are the amount of revenue that remains after all costs are paid.

Before deciding to make an investment, investors should consider a company’s revenue and profitability, but they need also consider other measures. Investors can identify possible investments more quickly, for instance, if they are aware of a few important financial measures pertaining to a company’s profitability, liquidity, solvency, and value.