Revenue, profit and earnings per share

What this lesson covers

• What revenue is, and why it is called the top line
• What profit is, and why strong sales do not guarantee it
• Why record revenue can sit alongside falling profit
• The EPS formula, in plain words and then with numbers
• Why two companies with identical profit can have very different EPS
• How new share issues and buybacks move EPS
• Where to find revenue, net income, EPS and shares outstanding on a company page
• Why one EPS number is never enough on its own

Where this sits in the series: Lesson 3 covered company value. This lesson covers company performance. Lesson 5 puts the two together as valuation, through the P/E ratio.

Revenue: money coming into the business

Revenue is the total money a company earns from selling its products or services, before any expenses are taken out. If a business sells products worth $1,000,000 during the year, that $1,000,000 is its revenue.

You will also see revenue called sales, or the top line — because it sits at the top of the income statement, before everything else is subtracted from it.

Different companies earn revenue in different ways. A retailer earns it when customers buy products. A software company may earn subscription revenue. A bank earns income from interest and fees. In every case, revenue measures money coming in from normal business activity. It does not tell us how much of that money the company actually keeps.

Profit: what remains after expenses

To get from revenue to profit, we subtract what it cost to run the business — wages, materials, rent, technology, interest and tax.

Net profit is often called net income, or the bottom line. In this simplified example, $200,000 is what the company has left once it has accounted for its costs.

This is why a large revenue figure does not automatically mean a highly profitable company. You have to look at both the money coming in and the cost of earning it.

Revenue growth does not guarantee profit growth

Here is the same company across two years.

Revenue rose by twenty per cent. At first glance that looks encouraging. But expenses rose faster, so profit halved.

The habit to build: when you hear that a company has reported record revenue, look at profit as well. Investors usually want to know whether higher sales are turning into stronger earnings, or simply into higher costs.

EPS connects company profit to each share

We now know the company's total profit. The next question is how that profit relates to a single share. That is what earnings per share answers.

Our example company has net profit of $200,000 and 100,000 shares outstanding.

One important clarification. EPS of $2.00 does not mean the company pays $2.00 to every shareholder. A company may keep earnings in the business, use them to grow, reduce debt, buy back shares, or pay part of them out as dividends. EPS is an accounting measure of profit per share. It is not the same thing as a dividend.

The number of shares changes EPS

This is why shares outstanding matter. Both companies below earn exactly the same net profit: $200,000.

The total profit is identical. The profit connected to each share is not, because the same earnings are spread across twice as many shares.

This works in both directions. A company can issue additional shares, which may reduce EPS if profit does not grow enough to keep up. A company can also buy back its own shares, which may increase EPS because the earnings are divided across fewer of them. So when EPS moves, it is worth asking which number changed — the profit, or the share count.

EPS needs context

EPS is useful. On its own, it cannot tell you whether a share is a good investment.

Comparing a supermarket directly with a young technology company is unlikely to give you a useful conclusion. The businesses are not built the same way.

Basic and diluted EPS. Some finance websites show both. Diluted EPS includes the possible effect of securities that could later become ordinary shares. For a beginner it is enough to recognise that the two figures may differ, and to compare the same type consistently — basic against basic, diluted against diluted.

Where to find the numbers

In the video I use Yahoo Finance for the demonstration. Other platforms carry the same information under slightly different labels, so focus on the meaning of each figure rather than the menu it sits behind.

You may also see trailing EPS, which normally refers to earnings from the most recent twelve-month period.

Do not try to memorise every number on the page. Learn to recognise four of them — revenue, net income, EPS and shares outstanding — and then ask a single question: are these increasing, decreasing, or moving unevenly over time?

One practical note. Live company figures change after new financial results or corporate actions, so any number you see on screen is a snapshot of that date, not a permanent fact.

The three ideas to carry forward

When you look at a company, avoid relying on any single number. Look at revenue, profit and EPS together, and look at how all three have changed over time.

Where to go next

If you'd like to see these ideas applied to real companies and real results, How Markets Think is where I write that up each week — earnings, deals and market moves, explained in plain English.