Revenue vs. Earnings: Difference Between Earnings and Revenue

Revenue is the total amount of money a company takes in through gross sales of products. In other words, it’s the company’s earnings before interest and taxes (EBIT). More specifically, it’s actually the earnings before interest, taxes, depreciation, and amortization (EBITDA).

Companies often represent their total sales (or total revenue) on the top line of all relevant financial statements, hence why you might hear someone call a growth of revenue “top-line growth.” This contrasts with the company’s earnings statement you’ll see at the bottom line of the same documents, representing bottom-line growth.

Earnings represent a company’s profitability—its net profit margin after subtracting the cost of goods sold, taxes, debts, payroll, raw materials, real estate or rental costs, and more. In other words, earnings equal the amount of money left over from sales that a company doesn’t have to immediately pay back out for one reason or another.

While calculating earnings, you might also add in tax refunds and other sources of income besides sales. Think of a company’s earnings (or gross profits) as something akin to net sales revenue in the same sense your personal gross income differs from your net income. In the same way your company removes taxes, benefits, and 401(k) contributions from your gross paycheck amount, the same goes for the company’s total earnings.

Public companies especially need to make a regular habit of issuing net earnings reports (as well as information on revenue) to their shareholders. Monitoring quarterly earnings helps investors keep an eye on the financial health and performance of a business.

To better understand revenue vs. earnings, picture a company that sells ten billion dollars’ worth of products over the course of a year. Every cent of that ten billion dollars accounts for the company’s total revenue; however, this number doesn’t represent the company’s earnings.

Suppose the company owes two billion dollars in taxes, five billion in operating costs, and one billion in debts—accounting for eight billion total. As such, these revenue numbers dwindle down to the company’s true earnings: two billion dollars.

Revenue and earnings are similar but still different in some key ways. Consider these five core areas of difference:

1. 1. Effect on business: Revenue on its own might cover operating expenses but still not leave anything over in terms of earnings or profits. To perform well on the stock market, businesses attempt to entice investors by maximizing revenue and earnings simultaneously. This shows they can cover business operations and expenses while still making extra money on top of all those costs. While revenue allows businesses to remain solvent, maintaining high earnings enables them to remain competitive.
2. 2. Importance to investors: Both revenue and earnings can affect a company’s stock price or overall valuation on Wall Street. While everyone makes investment decisions for different reasons, it’s common for individual investors to look at the financial ratio between the two amounts when building out their portfolios. Still, high earnings often hold a greater degree of importance for investors since it shows companies can utilize their revenue responsibly and profitably to grow their business and, in turn, increase stockholders’ portfolio values.
3. 3. Meaning as a financial indicator: Revenue and earnings are two of the most important financial metrics for a company’s success over any period of time. Revenue signals a company’s total financial performance, while earnings show off a company’s financial health. In other words, revenue shows how much a company can sell, whereas earnings show how much a company can retain and put to good use after paying for primary operations costs and other expenses.
4. 4. Place on a business statement: Both revenue and earnings are almost always in the same locations on a company’s income statement or balance sheet. Gross revenue is at the top line of these financial statements, generally followed by a list of operating costs for all business activities, taxes, debts, and so on to subtract from this amount. What’s left over—the company’s profits or retained earnings—resides at the bottom line of these documents.

Gross earnings are the same thing as gross income. When a company issues a net income statement, it’s reporting its earnings under a synonymous name. Net income refers to any type of revenue left over after factoring in income tax, cost of operations, and a host of other expenses. These operating profit and loss financial statements might have an impact on a company’s shares on the market.

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