What is the meaning of a company’s revenue?
A company's revenue is the total amount of money it generates from selling its goods or services. It is often referred to as "sales" or "turnover." Revenue is a crucial indicator of a company's financial performance, as it represents its money available to cover its expenses and generate profits.
Revenue is typically reported on a company's income statement, a financial statement showing the company's revenues, expenses, and profits over a specific period (usually a quarter or a year). The income statement is used to assess the company's financial performance and to help investors and analysts understand how well the company is doing.
There are several different ways that companies can generate revenue, including selling goods or services to customers, licensing intellectual property, and generating investment income. Investors and analysts will typically look at a company's revenue growth over time to assess its financial health and identify trends and patterns relevant to its future performance.
Why is company revenue important to investors?
Company revenue is essential to investors for several reasons:
- Revenue is a crucial indicator of a company’s financial performance: Revenue is the money that a company generates from selling its goods or services and is a vital measure of its financial health. Investors and analysts will often look at a company’s revenue growth over time to assess how well the company is doing and to identify trends and patterns that may be relevant to the company’s future performance.
- Revenue is a key factor in calculating a company’s profits: A company’s revenue is critical in calculating its earnings. If a company generates high revenue levels, it is more likely to be profitable.
- Revenue can be used to evaluate a company’s valuation: Investors and analysts may use a company’s revenue to assess its valuation, either by comparing it to the revenue of similar companies or by using financial ratios such as the price-to-sales (P/S) ratio.
- Revenue can provide insight into a company’s business model: A company’s revenue can provide insight into its business model and how it generates money. For example, suppose a company generates a significant portion of its revenue from a single product or service. In that case, it may be more vulnerable to market changes than a company with a more diverse revenue base.
- Revenue can influence a company’s stock price: A company’s revenue can influence its stock price, as investors may view a company with strong revenue growth as a more attractive investment opportunity.
How do investors analyse a company with revenue history?
There are many ways investors can analyse a company's revenue over the years. Here are a few common approaches:
- Trend analysis: One approach is to look at the trend in the company’s revenue over time. Is the company’s revenue increasing, decreasing, or remaining relatively stable? Revenue trend analysis can give investors an idea of how well the company is performing and whether it is growing or declining.
- Comparison to industry benchmarks: Investors can also compare the company’s revenue to industry benchmarks to see how it performs and has performed relative to its peers. Industry comparison can help investors identify whether the company is a leader or laggard in its business industry.
- Revenue growth rate: Another way investors like to analyse a company’s revenue is to calculate its revenue growth rate. The revenue growth rate of a company is calculated by dividing its current revenue by its revenue in a previous period (e.g. the previous year) and expressing the result as a percentage. A high revenue growth rate may indicate that the company is performing well. In contrast, a low growth rate may suggest that the company is struggling.
- Revenue per share: Investors can also calculate a company’s revenue per share, which is the company’s total revenue divided by the number of shares outstanding. This can give investors an idea of how much revenue is generated per stock share.
- Revenue diversification: Investors may also want to consider the diversification of a company’s revenue streams. A company that relies heavily on a single product or service may be more vulnerable to market changes than a company with a more diverse revenue base.
- Revenue quality: Finally, investors should consider the quality of a company’s revenue. Is the revenue generated from sustainable sources, or is it coming from one-time or unsustainable sources? This can impact the long-term viability of the company.