Income vs. Revenue
RevenueRevenues refer to the total amount of money that a business is generating during a certain period, so if you're looking at a year's income statement the revenues are the total amount of sales made during that year. Revenues get a lot of attention from analysts because for any company to succeed they need have money coming in, and how revenues change year over year are important indicators of success.
When looking at a company's revenues you want to assess several key factors:
- How good are current revenues compared to prior years?
- What percentage have revenues changed compared to prior years, and what is the trend in this percentage over several years? This will tell you if the company's revenue trends are improving or not.
- How does the company's revenues compare to that of their peers? This will tell you something about their market share, and by comparing their growth to that of their peers you can see if they are doing well in the industry.
IncomeIncome, or profit, is what remains after you have deducted all of a company's expenses from the revenues they have generated. This is very important because if a company has significant revenues but no income (negative income being a loss) then it may indicate problems with the company's ability to continue. Many companies can survive a year or two of negative income, but if it continues too long the company will go bankrupt.
Ultimately income is a far more important measure when assessing a company from an investment perspective as a good income on any amount of revenues is what matters to investors. Dividends are for the most part paid out of that income, so it is a strong indicator of how much you can expect to earn.
When looking at a company's income you want to assess several key factors:
- How the profit percentage (income as a percentage of revenues) compares to prior years? This tells you whether the company is getting better or worse in terms of managing costs compared to revenues.
- How the profit percentage compares to that of competitors? This tells you whether the company is managing costs compared to revenues better or worse than its peers.
Income vs. RevenuesWhen considering income vs. revenues for investment assessment purposes it is a good idea to look at both. Ideally you want to see both improving, and the profit percentage improving as well due to better cost control. Revenue growth is a strong indicator of success, as all costs remaining constant as a percentage of revenues will result in a higher overall income. This isn't always the case so it's important to look at income also and where inconsistent results are found trying to understand the drivers for those results.
By Jeffrey Glen