There is a lot of confusion surrounding the terms used when talking about the financial results of a company. In this article, we will first review the definitions, then dig into an example.
There are so many terms that we decided to create a cheat table, to make everyone’s life easy:
|Gross Revenue||The income the company had, without accounting for any expenses. Gross Sales is just one of the components of Gross Revenue.|
|Net Revenue||The income the company had, minus expenses directly related to that income|
|Revenue||Usually means Gross Revenue|
|Gross Sales||The amount of money made from the sales of goods and services. It is just one of the components of Gross Revenue.|
|Net Sales||The amount of money made from the sales of goods and services, minus expenses directly related to those sales|
|Sales||Usually means Gross Sales|
|Income From Continuing Operations||Similar to Net Revenue, but only considers activities that are continuous (excludes one-time sales unrelated to the core business, for example, a sale of machinery when you are a restaurant business)|
|Income from Operations||Same as Income From Continuing Operations|
|Net Income||The total amount of money the company made or lost in the period after all expenses are taken into account|
|Profit||Same as Net Income, when it’s positive|
|Loss||Same as Net Income, when it’s negative|
|Earnings||Same as Profit|
|Bottom Line||Same as Net Income (usually can be found at the bottom line of financial statements)|
Let’s take a look at a financial statement from Alphabet, Google’s parent company. We can find their financial statements on their website’s investor relations section. Here is a sample from their 2019 fiscal year report, on page 51:
As we learned in our cheat table, Revenues equals Gross Revenue, meaning that the money resulting from the company's operations, without considering any expenses, amounted to $161,857,000,000 in 2019. Since we don't have, in this report, a breakdown of Revenues, some people will casually intermingle the terms Revenues and Sales. That's not really accurate, because we can't see if there is another source of income besides Sales. For example, we could have indirect income from many different types of contracts.
A few lines below, we can find Income from Operations. Looking at our cheat table, we know that it means: $34,231,000,000 was the revenue related to the core business of the company, minus the cost of that revenue, in 2019.
The next line, Other income (expense), net is used to indicate any non-core business income or expenses the company might have had.
Now, looking at the bottom line of the first section of the report, we find Net Income, which is positive, so we have a Profit. It accounts for the income taxes above it, and totals $34,434,000,000, in 2019. This is the most important result of the company.
We can see in the report that the Net Income increased by 143% from 2017 to 2018, and 11.74% from 2018 to 2019. At stockompare, we believe that this is an important indicator of the ongoing performance of the company. That’s why we have a graph for it when you kompare a stock:
By observing this graph, we can learn which companies are outperforming the Market and others companies in Net Income growth, and identify trends and 'one-time' results that might not repeat. A solid company will deliver good results continuously, and the risk of investing on it will be much lower.
Those lines indicate the EPS, or Earnings per Share. In our next article, we will discuss how the Net Income is used to calculate EPS and the PE Ratio, a very important metric in the valuation of a stock. Stay tuned!