Revenue vs Earnings vs Profit: What's the Difference?

Why Revenue and Earnings Are Not the Same Thing

When Amazon reported $575.5 billion in revenue for 2022, the stock barely moved. When the company announced $-2.7 billion in net earnings (a loss), the market yawned. This seems contradictory until you understand that revenue and earnings measure completely different aspects of business performance.

Revenue is the top line—every dollar that flows into a company from selling products or services. Earnings is the bottom line—what remains after paying employees, buying materials, servicing debt, and paying taxes. One measures opportunity; the other measures profitability.

Consider two fast-casual restaurant chains, each generating $500 million in annual revenue:

• Chain A: $500M revenue, $8M net earnings (1.6% margin)
• Chain B: $500M revenue, $45M net earnings (9% margin)

Chain B is the superior business, despite identical sales. The difference: efficiency, scale advantages, or better unit economics. A fundamental analyst buying Chain A would overpay; a fundamental analyst buying Chain B would be getting true value.

Understanding the Income Statement Waterfall

Revenue flows through an income statement like water through a series of locks, with expenses siphoning away at each stage. To master revenue vs earnings, you need to understand where the leaks are.

Revenue (The Starting Point)

Revenue is straightforward: it's the total amount of money a company receives from customers. For Starbucks in fiscal 2023, that was $36.2 billion across all company-operated and licensed stores worldwide. This number gets reported first because it's the biggest and broadest measure of business activity.

But revenue alone tells you nothing about profitability. A grocery store might generate $50 million in annual revenue with paper-thin margins of 1-2%. A software company might generate $50 million with margins of 25-30%. Same revenue, radically different businesses.

Cost of Goods Sold (COGS)

The first deduction from revenue is cost of goods sold—the direct costs of producing what the company sells. For Starbucks, this includes coffee beans, milk, cups, and direct labor in stores. In 2023, Starbucks' COGS was approximately $15.7 billion.

The difference between revenue and COGS is gross profit: $36.2B - $15.7B = $20.5B. Gross profit margin (gross profit ÷ revenue) tells you how efficiently a company manufactures its core product. Starbucks' gross margin of 56.6% is healthy; it means the company keeps $0.57 of every dollar after direct production costs.

Compare this to Best Buy, which reported a gross margin of just 21% in 2023. Electronics retailers operate on thin margins because they face intense price competition. The business model is fundamentally different from Starbucks, though both operate retail stores.

Operating Expenses and Operating Income

After gross profit, companies deduct operating expenses: salaries for corporate staff, marketing, rent for headquarters, research and development, depreciation, and other costs required to run the business. For Starbucks, operating expenses totaled approximately $16.1 billion in 2023.

Subtracting operating expenses from gross profit gives you operating income (or EBIT—earnings before interest and taxes): $20.5B - $16.1B = $4.4B.

Operating income is critical for fundamental analysis because it reveals the profitability of the core business before non-operating factors like debt and taxes distort the picture. A company with strong operating income but heavy debt might still report low net earnings. Operating income strips away that noise.

Interest Expense, Taxes, and Net Earnings

From operating income, companies deduct:

• Interest expense: Cost of servicing debt. A heavily leveraged company pays more interest, reducing earnings.
• Tax expense: Federal, state, and local income taxes. A company's effective tax rate (actual taxes paid ÷ pre-tax earnings) typically ranges from 15-25%, depending on jurisdiction and credits.
• Other income/expense: One-time gains or losses from asset sales, currency fluctuations, or discontinued operations.

The result is net earnings (or net income)—the true bottom line. For Starbucks in 2023, net earnings came to approximately $4.1 billion. This is the profit available to shareholders after all expenses, interest, and taxes are paid.

The Revenue vs Earnings Comparison Table

Why Companies Can Grow Revenue While Earnings Shrink

This is where many beginning investors get trapped. A company can report explosive revenue growth—say 40% year-over-year—while earnings decline. How is that possible?

Scenario 1: Aggressive Expansion with High Upfront Costs

Netflix provides an instructive example. Between 2010 and 2015, Netflix's revenue grew from $2 billion to $6.8 billion (240% growth), but earnings barely budged. Why? The company was investing heavily in content production and global expansion, both capital-intensive operations. Revenue was soaring, but cash was being poured into future growth.

This isn't necessarily bad—if expansion investments pay off later. But it's crucial for investors to distinguish between revenue growth and earnings growth. A company spending 95% of revenue on growth will report huge top-line numbers but minimal bottom-line profit.

Scenario 2: Declining Profit Margins Due to Competition

When Best Buy saw Amazon's rise, it slashed prices to stay competitive. Revenue held up, but margins contracted. A retailer that posted $50 billion in revenue with 3% net margins can sell 40% more stuff and still earn less money if margins compress to 1.8%.

The math is brutal:

• Year 1: $50B revenue × 3% margin = $1.5B earnings
• Year 2: $70B revenue × 1.8% margin = $1.26B earnings

Revenue up 40%, earnings down 16%. A fundamental analyst who bought based on revenue growth alone would have made a bad bet.

Scenario 3: Acquisition-Driven Revenue, Accretion-Diluted Earnings

When Microsoft acquired LinkedIn for $26.2 billion in 2016, Microsoft's revenue jumped immediately (adding LinkedIn's $5B+ in annual sales). But earnings per share (EPS) didn't jump proportionally because Microsoft had to integrate operations and service the debt used for the acquisition. Shareholders saw revenue growth without proportional earnings growth—at first. It took years for the acquisition to become accretive to earnings.

Profit: The Three Types You Need to Know

The word "profit" gets used loosely, but there are three distinct types, each telling a different story about business quality.

Gross Profit

Gross profit (revenue minus COGS) reveals how efficiently a company manufactures and sells its core product. Two companies in the same industry with different gross margins are operating at different efficiency levels.

Apple vs. Dell in Q1 2024:

• Apple: ~46% gross margin (premium products, strong brand pricing power)
• Dell: ~19% gross margin (commoditized products, price competition)

Apple can invest more in R&D, marketing, and shareholder returns because it extracts higher profit from each unit sold. This is a structural advantage, not luck.

Operating Profit

Operating profit (EBIT) is the true measure of core business profitability. It excludes the financial engineering of debt and taxes, showing what the company actually earns from its operations.

Operating profit margins vary wildly by industry:

• Software (SaaS): 20-40% typical
• Pharmaceuticals: 15-25%
• Retail: 3-8%
• Airlines: 2-5%

These differences reflect industry dynamics, not management quality. An airline with a 4% operating margin isn't "worse" than a software company with 30% margins—they're in different businesses with different economics.

Net Profit

Net profit (or net income) is the final number after all expenses, interest, and taxes. This is what shareholders own. A company can have strong operating profit but low net profit if it carries heavy debt.

Example: Telecom companies often have operating margins of 30-40%, but net margins of 8-12%, because they carry massive debt and pay substantial interest expense. The business is profitable, but leverage reduces shareholder returns.

Real-World Example: How Profitability Diverges from Revenue Growth

Take two hypothetical SaaS companies, both founded in 2015 and both crossing $100 million in annual recurring revenue (ARR) by 2023:

GrowthCo: Spent aggressively on sales and marketing to capture market share. By 2023: $100M revenue, $5M net earnings (5% margin)

EfficiencyCo: Built a lean operation with a smaller sales team. By 2023: $100M revenue, $25M net earnings (25% margin)

Both companies grew at the same rate and reached the same revenue size. But EfficiencyCo generates 5x the profit. If both were priced at 10x revenue (a common SaaS valuation multiple), a fundamental analyst should prefer EfficiencyCo because:

• It has actual earnings to justify the valuation multiple
• It can reinvest profits into growth or return capital to shareholders
• It has a sustainable business model, not a growth-at-any-cost model
• A slowdown in growth doesn't mean a collapse in valuation

GrowthCo might eventually become profitable if it achieves operating leverage, but EfficiencyCo is the lower-risk fundamental play.

Common Mistakes and Pitfalls to Avoid

Mistake #1: Confusing Revenue Growth with Earnings Growth

A company reporting 50% revenue growth sounds impressive until you check earnings, which are down 20%. Investors who chase revenue growth without checking profitability trends often buy at market peaks and ride stocks down as markets reprrice for deteriorating profitability.

Mistake #2: Ignoring Profit Quality

Not all earnings are created equal. A company with $10M in earnings from core operations is more valuable than a company with $10M in earnings that came entirely from a one-time asset sale. Check whether earnings are recurring (from normal operations) or non-recurring (from special items).

Companies sometimes bury bad operating performance by reporting a large one-time gain. Read the footnotes.

Mistake #3: Using Gross Margin as the Final Profitability Test

A company with 80% gross margin might still be unprofitable if operating expenses are enormous. A software company spending 70% of revenue on R&D and sales might have 60% gross margins but only 5% net margins. Check all the way to the bottom line.

Mistake #4: Not Adjusting for One-Time Items

When comparing a company's earnings year-over-year, strip out one-time items. If a company reports $100M in earnings but $50M came from selling a subsidiary, the true operating earnings are $50M. Use adjusted earnings (or operating earnings) for year-over-year comparisons.

Mistake #5: Treating All Debt Equally

A company with $1 billion in low-interest debt it can easily service is different from one with $500 million in high-interest debt it struggles to pay. Interest expense directly reduces earnings. Higher debt = lower net earnings, even with identical operating performance. Understand a company's debt structure before comparing net earnings to peers.

Earnings Per Share (EPS): Revenue and Earnings at the Per-Share Level

Fundamental analysts often track earnings per share (EPS), not just total earnings. EPS is calculated as:

EPS = Net Earnings ÷ Shares Outstanding

A company can grow earnings while EPS shrinks if it issues new shares. Conversely, a company can grow EPS while total earnings stay flat through share buybacks.

Example: A company reports $1 billion in net earnings.

• Year 1: 500 million shares outstanding → $2.00 EPS
• Year 2: $1 billion in earnings again, but issued 100 million shares for an acquisition → 600 million shares → $1.67 EPS

Earnings are flat, but EPS declined because the earnings pie was sliced into more pieces. This is why share dilution matters—it reduces the earnings available to each existing shareholder.

How Professional Analysts Use Revenue vs Earnings Data

Institutional investors and equity research analysts use revenue and earnings data differently depending on the company's stage and industry:

Early-Stage Growth Companies

For unprofitable startups scaling to scale, revenue growth rate matters more than earnings. Amazon reported losses for years while revenue exploded. Investors focused on revenue growth and path to profitability, not current earnings.

Mature, Profitable Companies

For established companies, earnings matter far more. A mature retailer with slowing revenue growth but expanding margins is more attractive than one with growing revenue but shrinking profitability. The question shifts from "Can you grow?" to "How much profit do you generate from existing revenue?"

Cyclical Businesses

For cyclical companies (airlines, autos, chemicals), analysts look at peak earnings and trough earnings across full cycles. A company might report record revenue in Year 3 of an expansion but face collapsing earnings in Year 1 of a downturn. Understanding the earnings cycle is critical.

Why Earnings Quality Matters More Than Earnings Size

Two companies both reporting $500 million in annual net earnings are not equivalent:

Company A: $500M from core operations, recurring revenue model, predictable cash flows

Company B: $300M from operations, $200M from a one-time patent sale, likely not recurring next year

Company A has higher earnings quality because its profits are sustainable. Company B's earnings are inflated by a non-recurring item. If you valued both companies at 15x earnings, you'd overpay for Company B because next year's earnings will drop when the one-time gain doesn't repeat.

Professional analysts adjust for this by calculating adjusted earnings or operating earnings, removing one-time items to reveal the true earning power of the business.

How to Find Revenue and Earnings Data

For any publicly traded company:

• SEC filings (10-K and 10-Q): Official annual and quarterly reports with detailed income statements
• Investor relations website: Press releases and earnings reports
• Financial data sites: Yahoo Finance, Morningstar, Seeking Alpha, or TradingView all display revenue and earnings with historical charts
• Company earnings calls: Management often explains changes in revenue and profitability on quarterly calls

The SEC's EDGAR database is the authoritative source. Every 10-K includes a complete income statement showing revenue, COGS, operating income, and net earnings with year-over-year comparisons.

Frequently Asked Questions

Q: Can a company have high revenue but zero earnings?

A: Yes. A company generating $10 billion in revenue but spending $10 billion on operations, interest, and taxes will report zero earnings. This happens with high-growth startups (e.g., Uber, Tesla in earlier phases) and companies operating in low-margin industries during downturns.

Q: Is gross margin or net margin more important for fundamental analysis?

A: Both matter, but for different reasons. Gross margin tells you the efficiency of core operations. Net margin tells you what shareholders actually get. A company with high gross margin but low net margin might have controllable operating expense problems. A company with low gross margin might have a fundamentally uneconomical business model.

Q: Why do software companies have much higher profit margins than retail companies?

A: Fundamentally different economics. Software has high upfront development costs but near-zero marginal costs per additional customer. Retail has to buy inventory for every unit sold. This structural difference means software companies can generate 30-40% net margins while retailers typically manage 1-5%.

Q: What's the difference between operating earnings and net earnings?

A: Operating earnings (EBIT) excludes interest expense and taxes, showing the profit from core business operations. Net earnings includes those items, showing the true profit available to shareholders. A company with strong operating earnings but high debt and taxes might have lower net earnings. Operating earnings is useful for comparing two companies with different capital structures.

Q: Should I buy a stock based on revenue growth or earnings growth?

A: Depends on the company's stage. Early-stage, unprofitable growth companies (think 2015 Netflix or 2010 Tesla) should be evaluated on revenue growth and path to profitability. Mature, profitable companies should be evaluated on earnings growth and profitability expansion. Mixing the two approaches leads to mistakes.

Q: How do I know if a company's earnings are "real" or inflated by accounting tricks?

A: Compare net earnings to operating cash flow. If earnings are much higher than cash generated from operations, something's off. Check footnotes for one-time items, changes in accounting estimates, or non-cash charges. Read the management discussion section of the 10-K. If management is hiding something, it's usually in the details.

Key Takeaways: Revenue vs Earnings

Revenue and earnings measure fundamentally different things. Revenue is the top line (total sales); earnings is the bottom line (profit after expenses). A company can grow revenue dramatically while earnings shrink if it's spending heavily on growth or if margins are contracting due to competition.

Understanding profit at three levels—gross profit (manufacturing efficiency), operating profit (core business profitability), and net profit (shareholder returns)—gives you a complete picture of business quality.

Professional fundamental analysts use both metrics but weight them differently based on context. Early-stage companies are evaluated on revenue growth and margin expansion potential. Mature companies are evaluated on earnings growth and return on invested capital. Cyclical companies are evaluated across full earnings cycles, not peak years.

The most common investor mistake: chasing revenue growth without checking whether earnings are growing or shrinking. This leads to overpaying for companies with deteriorating profitability. Always track both the top line and the bottom line.

Next Steps

This article is part of Ticker Daily's Fundamental Analysis guide. Now that you understand revenue vs earnings, you're ready to:

• Learn about profit margins and how to use them to compare companies in the same industry
• Understand return on equity (ROE) and why it matters more than raw earnings size
• Explore free cash flow, which sometimes tells a different story than earnings
• Master valuation multiples like P/E ratio, which connects earnings to stock price

Start by pulling a 10-K for a company you follow. Find the income statement. Trace revenue down through COGS, operating expenses, interest, and taxes to net earnings. This manual exercise will cement your understanding far better than any explanation.