Revenue, profit and margins
The three numbers that tell you whether a business actually makes money.
From sales to profit
Revenue (also called sales or the top line) is all the money a company brings in from selling things. It is not profit. A lemonade stand that sells $1,000 of lemonade has $1,000 of revenue, even if lemons and cups cost $900.
Subtract the direct costs of making what you sell and you get gross profit. Subtract running costs like salaries, rent and marketing and you get operating profit. Subtract interest and taxes and you get net income (the bottom line), what's left for shareholders.
Margins: profit per dollar of sales
A margin is profit divided by revenue. A 20% net margin means the company keeps 20 cents of every dollar of sales as profit.
Margins differ hugely by industry. Supermarkets often run thin net margins of a few percent but sell enormous volumes. Software companies can have much higher margins because selling one more copy costs little. So compare a company's margins with its own past and with similar companies, not with everyone.
What to look for
Is revenue growing? Are margins stable, rising or shrinking? A company growing sales while margins collapse may be buying growth expensively. A company with shrinking sales but rising margins may be cutting costs, which can only go so far.
Revenue: $10 million. Coffee beans, milk and cups: $3 million. Gross profit: $7 million, a 70% gross margin.
Salaries, rent and marketing: $5.5 million. Operating profit: $1.5 million, a 15% operating margin.
Interest and taxes: $0.5 million. Net income: $1 million, a 10% net margin. Of every $5 latte, about 50 cents ends up as profit.
Key terms
- Revenue
- All the money a company brings in from sales, before any costs.
- Net income
- Profit left after all costs, interest and taxes. Also called the bottom line.
- Margin
- Profit divided by revenue, showing how much of each sales dollar is kept as profit.
Revenue is what comes in; profit is what's left; margins show how efficiently one turns into the other.