Revenue is one of the most important metrics in investment analysis. It's also one of the easiest to understand. Simply put, revenue is the money the company makes from selling its products or services. It is the money that comes in the door whenever the company records a sale. It can also be referred to as gross sales or topline, because it's on the top line of the income statement.
Revenue is a great indicator of overall growth because it's not influenced by expenses, taxes, interest charges, or anything else that factors into the company's profitability. At the very least, a rising revenue stream indicates that the company's sales are growing. Similarly, a shrinking revenue number shows that sales are slowing.
Revenue is often confused with other terms like net income and cash flow. While there are similarities between those various terms, it's important to know the distinctions. Net income is what a company has after all expenses, taxes, interest, and other charges have been deducted from revenue. If revenue is topline, then net income is bottom line. Revenue is sales, while net income is profits.
Cash flow and revenue also differ. Cash flow is any cash that comes into the business. While that often includes revenue, it can also include other things. A loan can generate cash flow. The sale of property or equipment can produce cash flow. However, neither of those represent revenue because the don't come from the company's sale of its products or services.
Revenue as an analysis tool
Revenue growth is always a good sign, but you can't only look at revenue without considering other factors. Revenue can be influenced by a number of variables, so it's important to understand those variables before using revenue as an analysis tool. One variable is whether or not the company has a seasonal sales cycle. For example, retail companies may see a big sales boost around the holidays. Travel businesses may see more revenue in the warmer months. For seasonal businesses, it would unwise to compare revenue from in-season quarters to those of out-of-season quarters.
Another big variable is new product launches. Apple (AAPL) should see a boost in revenue when it releases a new iPhone. The question in that case isn't whether they saw a bump in revenue, but whether that bump met expectations. Revenue growth alone isn't always the best indicator.
Revenue and tech companies
Profitability isn't always certain when it comes to growing tech companies. In fact, some of the hottest tech investments have never been profitable. LinkedIn (LNKD) is a great example. When the company went public in 2011, it was barely profitable. Over the past few years, though, its revenue has soared from $243 million in 2010 to $1,528 million in 2013. Over that same period, the stock has climbed more than 129 percent.
That rapid revenue growth tells investors that LinkedIn is growing its user and advertising base. That gives investors trust that the company will continue to scale, improve its operations, and generate profits.
In tech, when profitability may or may not be there, revenue is a good number to use to determine whether a company is headed in the right direction. Any fast-growing tech company should have rapidly rising revenue. Stagnant revenue in a growth company is a red flag.
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