Income vs Revenue vs Earnings

Three of the most popular terms in the business, accounting, and finance sectors that are often confused

Author: Abhinav Bhardwaj
Abhinav Bhardwaj
Abhinav Bhardwaj
As a highly motivated final year student and Summer Analyst at Park House Partners, I possess a strong track record in finance through academics, bolstered by my previous roles as a Finance Research Analyst and Treasurer for Aber Asian Society. With a deep passion for the field, I excel in investment analysis and financial modelling. Currently, I am actively engaged in conducting comprehensive market research, evaluating investment opportunities, and presenting insightful reports. Proficient in analysing financial statements, identifying emerging market trends, and delivering compelling presentations. As a former Treasurer for Aber Asian Society, I successfully managed financial activities while fostering inclusivity through dynamic cultural events. Committed to further enhancing my expertise in finance to drive impactful contributions in the industry.
Reviewed By: Himanshu Singh
Himanshu Singh
Himanshu Singh
Investment Banking | Private Equity

Prior to joining UBS as an Investment Banker, Himanshu worked as an Investment Associate for Exin Capital Partners Limited, participating in all aspects of the investment process, including identifying new investment opportunities, detailed due diligence, financial modeling & LBO valuation and presenting investment recommendations internally.

Himanshu holds an MBA in Finance from the Indian Institute of Management and a Bachelor of Engineering from Netaji Subhas Institute of Technology.

Last Updated:December 1, 2023

What Are Income, Revenue, And Earnings?

Income, Revenue, And Earnings are three items that can be found in a company's financial statements. By analyzing them, investors can gauge a company's profitability and future prospects.

Income is the money earned by a person or organization after all expenses are deducted. It comes from various sources, including the sale of goods, services provided, or capital investments.

Revenue is the total amount of money a business brings in from its regular operations. It's the top line of a business and includes the money made from selling products or services.

Earnings represent a company's net profits. In simpler terms, it's what remains after deducting all expenses from the total revenue. Earnings are often referred to as the bottom line of a business. A company's net profits are its earnings. Thus, income and earnings can also be synonymous sometimes, as earnings are the income generated by a company after deducting all expenses.

Key Takeaways

  • Income is the amount of money a company makes through the sale of goods, provision of services, or investment of capital.
  • Revenue is the total amount of money a company makes through its core business operations.
  • Earnings are the amount of money a company makes after all expenses are deducted, as seen at the bottom of an income statement.
  • Income, revenue, and earnings can be analyzing using financial analysis ratios, such as operating income margin, revenue turnover ratio, and price-to-earnings ratio.
  • Carefully analyzing income, revenue, and earnings can help investors make sound investment decisions.

What is Income?

For businesses, it describes the amount of money they receive through the sale of goods, provision of services, or investment of capital. For individuals, it is the gross financial compensation received by an individual in the form of wages or salary in return for their service.

Income can be gross, such as revenue, or net, such as earnings. It can also be related to the company's main business operations or to non-operating activity or a non-recurring transaction.

Measures of income which are widely used include gross profit, which is equal to revenue minus cost of goods sold (COGS), and operating income, which is equal to gross profit minus operating expenses.

Shareholders and managers use such measures to identify problems and inefficiencies and make decisions about investments. Financial analysis ratios such as gross and operating profit margins are used to compare between the profitability of different investments during the same time period or to analyze the profitability of one investment over several time periods.

Income measures play a vital role in business; positive income on a company's financial statements signals profitability and is attractive for investors.

What is Revenue?

Revenue, also known as the top line, is the total amount of money generated through the sale of goods or provision of services. In simple terms, it is the amount a firm receives from the sale of its output before any expenses.

Revenue can be generated from various sources, according to the nature of the business. For example, banks' revenues are mainly comprised of interest while manufacturing companies' revenues mostly come from the sale of physical goods.

Revenue is a very important measure to financial analysis. When analyzing a company, the first step is analyzing its revenue drivers and growth potential. Moreover, many items on the income statement and balance sheet are forecasted based on revenue growth assumptions.

Revenue is generally calculated by multiplying the number of units sold by the average price of the products or services sold, as in the formula below:

Revenue = number of units sold X Average price of service or goods

A vital ratio consisting of revenue is the cost of revenue ratio, which is calculated as the cost of revenue to total revenue (TR). The formula is as listed below:

Cost of Revenue Ratio = Cost of Revenue / TR

According to the general rules of economics -

  • If demand for a product is elastic, a price rise will reduce total revenue. 
  • Price and revenue have a constructive relation when demand is inelastic, meaning a price increase would also result in increased total revenue and vice versa. 
  • Changes in the total revenue depend upon the price elasticity of demand, 

What are Earnings?

Earnings, also known as net profit or income, are the amount of money left after all expenses for the financial period are deducted. This measure plays a significant role in determining a company's stock price and is very helpful in assessing a company's profitability. The formula is:

Earnings = Total Revenue - Total Expenses

Increasing earnings can increase a company's stock price and vice versa. Rising stock prices sometimes do not mean solid earnings for the company but indicate that investors are expecting the company's earnings to grow.

Two very important measures related to earnings are earnings per share (EPS) and price-to-earnings ratio (P/E). They are a couple of the most commonly used measures in finance analysis to determine a company's investment merit. 

EPS is calculated by subtracting preferred dividends from net income and dividing it by the average number of common shares, as in the formula below: 

EPS = Net Income-Preferred dividends/ Average number of common shares

EPS represents the amount of money a company has generated for each share of its common stock. This amount of money can be either distributed as dividends or reinvested in the company to drive future growth and pay larger dividends.

The P/E ratio is a relation between a company's share price and its earnings per share, calculated by dividing the stock price by EPS, as in the formula below:

P/E Ratio = Stock Price / EPS

The P/E ratio represents the amount of money investors are willing to pay for a company's stock for each dollar of earnings. Thus, companies trading at higher P/E ratios are expected to have higher growth when compared to their peers with lower P/E multiples. Hence, the former attract growth investors while the latter attract value investors.

In conclusion, income, revenue, and earnings all different but equally important financial measures. A careful analysis can help investors determine a company's profitability and investment attractiveness as it provides general information about the company but also helps in understanding business insights and comparisons to other businesses with the help of ratios and analysis.

Researched and authored by Abhinav Bhardwaj | LinkedIn

Edited by Colt DiGiovanni | LinkedIn

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