When evaluating a company from an investment perspective two of the key figures to look at are the revenue and income amounts generated by that company. This article will help you differentiate between the two and also understand how they each need to be assessed.
Revenues 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 to 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:
Income, 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:
In addition to income, many investors also look at EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) because it eliminates some factors that aren’t as important in terms of assessing a company’s ongoing health. Depreciation and amortization are non-cash items, so they don’t impact the cash available in the organization for dividends and investment. Tax can be impacted by many other factors and so the swings it can generate in income can be misleading. Interest is removed to improve comparability to other companies, as they may have a different debt to equity structure and have higher or lower interest payments as a result.
When 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.