Shashank Sabniveesu

Reading Financial Statements - Terminology (Financials Series Part - 2)

Revenues

• Revenue = All incoming money a.k.a The Top Line
  • Profit = Revenue - Expenses
• Operating Revenue = Money earned from actual sales in a business

Profits

• Gross Profit = Operating Revenue - Cost of Goods Sold (COGS)^[1][2]
• Operating Profit = Gross profit - Operating Expenses - Depreciation and Amortization
• Net Profit (or Net Income a.k.a The Bottom Line) = Operating Profit - Interest payments - Taxes

[1] Cost of Goods Sold (COGS) includes machinery costs, direct labor costs, raw material costs [2] Cost of Goods Sold (COGS) does not include money paid to sales department, advertising etc. That goes into Operating Expenses

EBIT

Earnings Before Interest and Taxes (EBIT) = operating profit + non-operating revenue^[3]

[3] Non-operating revenue includes income from non-core business activities such as income from investing company’s cash, income gained by selling a division etc.

Take-aways

• Growth in EBIT doesn’t tell the full story. Look at Growth in Operating Profit (or that in Operating Revenue) if not that in Net Profit a.k.a The Bottom Line

Corrections

Found any corrections? Please open an Issue referencing the title or tweet at me

Additional Reading

1. Investopedia - What’s the difference between gross profit and operating profit?