I’m sure you’ve heard some version of the phrase “it’s the bottom-line that counts.” The bottom-line refers to what you get to keep of your income after all your expenses and bills are paid.
Earnings and Bottom-Line Growth
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In business terms, the bottom-line represents earnings. Earnings are arguably the ultimate measure of growth of a business because it’s the bacon you can take home at the end of the day. You might be more familiar with using the term “net pay” or “net income” or “net earnings” from your own pay slips.
Earnings are the “take-home pay” of businesses. You want to find companies that are growing their earnings because this is what they keep after they’ve paid their bills. It’s why “earnings results” reports each quarter are eagerly awaited. Pay attention to metrics such as earnings per share (EPS) growth and price-to-earnings (P/E) ratios.
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Revenues and Top-Line Growth
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So the opposite is obviously true for the so-called (but less heard mention of) “top-line.” When reports refer to “top-line growth,” they’re referring to revenues. Revenues is the business term equivalent of “gross pay,” “gross earnings (although these aren’t earnings, strictly speaking)” and “gross income.”
Revenues represent the “total gross income” of a company. Business revenues can come from the sale of goods and services as well as investment income (interest, dividends, acquisitions, etc.).
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Revenues or Earnings More Important?
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Arguably, top-line growth is more important, but also a more misleading figure than bottom-line growth. It’s more important in the sense that any earnings growth is going to have to come from revenues. But it’s misleading because on its own it doesn’t tell you what the company is actually making in profits (since the numbers don’t reflect what the business has to pay out in expenses).
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{ 3 comments }
Hey,
Very clear description of the difference between earnings and revenue.
The business I work for during the day had an increase in Revenue last year last year by about 100K, but they didn’t increase earnings from the year before. Why? because they put that 100k back into the company so that this year the increase will be by over 250k.
So, in a growing company (if you’re not growing you’re dying) I think it’s most important that the revenue climbs while you work on managing expenses so the earnings can also increase.
Thanks for the post,
Guy
Thanks Guy, that helps add to the picture. Good point about revenues growth not necessarily leading to earnings growth – hence why EPS and P/E are the key stats to watch for from an investor’s point of view.
Hey ME,
Nice summary! I think about it this way…
In my job, I’ve rather have lots of revenue and work hard to trim expenses, then to have limited revenues to begin with. I believe the same can be said for both young and established companies. Cheers!
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