Revenue vs profit: What to know when investing

You’ll see these terms on a company’s income statement.

Elissa

Elissa Suh

Published July 9, 2019

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KEY TAKEAWAYS

  • Revenue is the total income

  • Profit = Revenue - expenses

  • There are different types of profit

  • Example expenses: payroll income, labor, and materials

If you’re thinking about investing in a company, it might be good to look over the company’s income statement — a business’ financial record of what’s being spent and on what. Some key figures you’re bound to see on the statement include profit and revenue, and variations of the two.

Used primarily when referring to businesses and how much money they’re generating, revenue and profit are closely related but mean different things.

Revenue is the total income from sales, while profit describes total income minus expenses. A company might have high revenue, but still not make a great profit. We’ll discuss why this might be and further differences between the revenue vs profit.

In this article:

What is revenue?

Revenue is how much money a company has earned before accounting for anything else. It’s the face value of the total sale of goods or services.

For example, if you own an ice cream shop, the revenue would simply be how many ice creams you sold. This number does not reflect the fact that you probably had to spend some money in order to open up the shop in the first place.

Revenue is typically recorded over a specified period of time, such as a quarter or year, based on when the business issues their income statement. You’ll see the revenue at the top of this profit and loss statement, because it is the first thing you need to know to better understand and calculate more nuanced figures, like profits (which we’ll discuss later).

Other types of revenue

Net revenue or net sales, for example, describe how much money the business made after accounting for any discounts, rebates, and returns.

What is profit?

Profit describes the financial gain of a company. It is the revenue minus any payroll income and expenses. There are different types or stages of profit, depending on what type of expenses you’re subtracting.

Profit = Revenue - expenses

Profit margins

Using profit, you can calculate the profit margin, which is expressed as a percentage. You can see how much costs cut into the profit, and therefore the revenue.

The profit margin indicates a company’s potential to make money or how profitable the business might be. (A higher percentage is more desirable.)

Profit margin = (Profit / revenue) * 100

You can calculate the margins based on the different types of profit, and consider it a measure of potential growth when taking on an investment in a particular business.

Gross profit

Revenue does not reflect any costs like labor and materials that went into the sales. Gross profit accounts for cost of goods sold (COGS), like any labor and materials. For example, the gross profit of an ice cream shop might be the revenue minus the costs of milk and sugar.

Gross profit = Revenue - cost of goods sold (COGS)

Operating profit (operating income)

If you further subtract operating expenses, like rent, utilities, and employee payroll wages, you’d get the operating profit. Operating expenses are the day-to-day costs of running a business, and include marketing, research and development, office supplies or equipment, administrative expenses, and accounting services.

Read more about operating income.

EBITDA

On an income statement you might also see EBITDA or earnings before interest, taxes, depreciation, and amortization. This is nearly the same as operating profit, but isn’t a term used in accordance with generally accepted accounting principles (GAAP), which sets the standard in the US.

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Net profit (net income)

The revenue can be further dwindled down until you reach the net profit. Also known as net income, this is what remains after you account for the business’ total expenses, including debts and taxes, depreciation and amortization of assets, and extra inflows and outflows of cash.

Net profit is commonly referred to as the bottom line, or how much money you’ve really made. After all the subtractions have been made, a business can have a negative net income, even though it may have started with very large revenue.

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