Revenue vs Net Income: From Sales to Profit

Revenue and net income are the top and the bottom of the income statement. Almost everything a company reports sits between them.

The walk down the income statement

1. Revenue (also "net sales" or "total sales"): the money earned from customers in the period.
2. Cost of revenue (cost of goods sold): the direct cost of making or delivering what was sold.
3. Gross profit = revenue - cost of revenue. Gross margin is gross profit divided by revenue.
4. Operating expenses: research and development, sales and marketing, general and administrative costs.
5. Operating income = gross profit - operating expenses. Divided by revenue, this is the operating margin.
6. Interest and other income or expense: interest paid on debt, interest earned on cash, gains or losses on investments.
7. Income tax.
8. Net income: what remains for the owners. Divided by revenue, this is the net margin.

Then EPS (earnings per share) is net income divided by the number of shares. See GAAP vs adjusted EPS.

Why both matter

• Revenue growth shows whether demand for the product is rising. Revenue can grow while profit falls if costs grow faster.
• Net income shows what is left after everything, but it is affected by items that have little to do with the core business: a tax change, a big gain or loss on an investment, a write-down.

A company can have high revenue and no profit (a young growth company spending heavily), or modest revenue and high profit (a lean, specialized business). Neither number alone tells you much. The ratio between them, and how it changes, does.

Questions to ask of any quarter

• Did revenue grow faster or slower than costs? (Check the margins.)
• Did net income change for operating reasons or because of one-time items? (Read the MD&A.)
• Did the share count change? Buybacks raise EPS growth above net income growth, and new share issuance does the opposite.
• Is profit turning into cash? See free cash flow.

Where the numbers are

The income statement is the first table in the financial statements of a 10-Q or 10-K. See how to read a 10-Q.