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Revenue
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Revenue is the top line on an income statement.
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It's the money a business takes in during a reporting period.
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Revenue is calculated by multiplying the average sales price by the number of units sold.
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Revenue can come from a variety of sources including the sale of goods & services, and the sale of long-term assets —like land or equipment.
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Revenue is different from income, income is the money left over after all expenses are accounted for —including taxes and other costs.
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Revenue Growth
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Revenue growth is the increase (or decrease) in a company's sales from one period to the next.
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It's calculated as a percentage by subtracting the previous period's revenue from the current period's revenue, and then dividing that number by the previous period's revenue.
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Revenue is usually listed on the first line of the income statement as revenue, sales, net sales, or net revenue.
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The income statement shows a company's revenues, expenses, and profitability over a period of time.
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It is also sometimes called a profit-and-loss (P&L) statement or an earnings statement.
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Cost of Revenue
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The cost of revenue is the total cost of manufacturing and delivering a product or service to consumers.
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It's found in a company's income statement.
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The cost of revenue includes the following costs:
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The cost of goods or services sold
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The cost of manufacturing and distributing the goods or services
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The cost of selling and marketing the goods or services
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Indirect costs (such as depreciation and salaries paid to management) are excluded from the cost of revenue.
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The cost of revenue is more than the traditional cost of goods sold because it includes the selling and marketing activities associated with a sale.
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Gross Profit
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Gross profit is the profit a company makes after deducting the costs associated with making and selling its products (or the costs associated with providing its services).
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Gross profit will appear on a company's income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue (sales).
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R&D Expenses
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Research and development (R&D) expenses are listed on a company's income statement as a line item under operating expenses.
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R&D expenses include the costs of developing and improving a product or service, including the original design and any enhancements made over time.
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R&D expenses are treated as an expense on the income statement on the date incurred.
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There are some accounting standards related to booking R&D expenditures IE: purchased assets and materials that have alternative future use are recorded as assets.
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R&D expenses may be classified as an operating expense if they're considered necessary for the company to maintain its current level of operation IE: if a company is developing a new product, the R&D costs associated with that product may be classified as an operating expense.
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SG&A Expenses
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SG&A stands for “selling, general & administrative”, SG&A expenses are recorded on a company's income statement in the section below the gross profit line item.
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SG&A expenses are all non-production expenses incurred by a company in any given period IE: rent, advertising, marketing, accounting, litigation, travel, meals, management salaries, bonuses, etc.
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SG&A expenses are typically the costs associated with a company's overall overhead since they cann't be directly traced to the production of a product or service.
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SG&A includes nearly everything that isn't included in cost of goods sold.
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SG&A expenses are reported on the income statement in the period they occur during.
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Since SG&A expenses aren't a product cost they're not assigned to the cost of goods sold or to the goods that are in inventory.
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Operating Income
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Operating income is a company's profit after deducting operating expenses.
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It's calculated by subtracting the total operating expenses from the total gross income.
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Operating income reflects the profitability of a company's core business and doesn't account for extraordinary income or expenses.
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The resulting number is shown as a subtotal on a company's multi-step income statement.
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Interest Expense (Operating)
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Interest expense is the cost of borrowing money and is subtracted from a company's revenues on the income statement to calculate its operating income or net income.
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It's considered an operating expense and is recorded as a deduction from revenues on the income statement.
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Interest expense usually appears below the EBIT (Earnings Before Interest and Taxes) as a separate line on the income statement, although some businesses choose to list this expense in the SG&A (Selling, General, & Administrative) section instead.
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Interest expense represents interest payable on any borrowings, including loans, bonds, or other lines of credit.
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It's essentially calculated as the interest rate times the outstanding principal amount of the debt.
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Interest Expense (Non-Operating)
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Interest expense is a non-operating expense on an income statement.
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It represents the cost of borrowing money, such as from loans, bonds, or lines of credit.
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Interest expense is subtracted from a company's revenues to calculate its operating income or net income.
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Interest expense is usually at the bottom of an income statement after operating expenses, usually it has its own line item although it can be combined with interest income.
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Interest expense is calculated as the interest rate times the outstanding principal amount of the debt.
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EBT (Earnings Before Tax)
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Earnings before tax (EBT) is a measure of financial performance that appears as a line item in the income statement.
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EBT is calculated by subtracting all expenses excluding taxes from revenue IE: if you're a freelance writer and you earned $1,000 last month your EBT would be $1,000 minus any expenses you incurred in the course of your work —such as the cost of your computer, internet service, etc.
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EBT is also referred to as pre-tax income.
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Income Tax Provision
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The provision for income taxes on an income statement is the amount of income taxes a company estimates it will pay in a given year.
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Typically, it's represented quarterly with each earnings report on the company's income statement.
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Income After Tax
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Income after tax is the amount of money that a business has once expenses, tax, and other liabilities have been deducted —it's also known as net income, net earnings, or profits.
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To calculate net income after taxes (NIAT), use the following formula:
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Gross sales revenue - cost of goods sold - business expenses - depreciation - interest - amortization - taxes = NIAT
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After-tax income can also be calculated using the simplified formula:
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After tax income = gross income - applicable taxes
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After-tax income is the net income after deducting all applicable taxes.
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For individuals and corporations, the after-tax income deducts all taxes (including: federal, provincial, state, and withholding taxes).
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Dividends (Prefered)
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Preferred dividends are reported on the income statement as a subtraction from net income, and is necessary in order to report the earnings available for common stock.
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Preferred dividends are not reported as expenses, instead they impact the shareholders' equity section of the balance sheet.
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Preferred dividends are allocated to and paid on a company's preferred shares, therefore if a company is unable to pay all dividends the claims to preferred dividends take precedence over the claims to dividends for common stock shares.
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Net Income
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Net income is the profit available to a company's shareholders after all business expenses, including taxes, have been paid —it's the last line item on the income statement.
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Net income is calculated by subtracting total expenses from total revenues.
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Total expenses include:
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the cost of goods and services sold
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selling, general and administrative expenses
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operating expenses like salaries & wages, office maintenance, utilities, etc
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depreciation and amortization
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interest, taxes, and other expenses
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Net income is also known as net earnings or the bottom line.
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EPS (Basic Earnings Per Share)
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Basic earnings per share (EPS) is a profitability metric that tells investors the amount of a firm's net income was allotted to each share of common stock (it's reported in a company's income statement).
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Basic EPS is calculated by dividing a company's net income by the weighted average of common shares outstanding IE: if Company XYZ had a net income of $_ last year and _ shares outstanding during that time, it would have basic earnings per share (EPS) of $_/_
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Basic EPS is the figure most commonly reported in the financial media and is also the simplest definition of EPS.
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It's especially informative for businesses with only common stock in their capital structures.
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EPS (Diluted Earnings Per Share)
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Diluted earnings per share (diluted EPS) is a performance metric that measures a company's profitability.
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It's calculated by dividing a company's net income by the number of shares outstanding, including both common and preferred shares.
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Diluted EPS takes into account all potential dilution that would occur if convertible securities were exercised or options were converted to stocks; thereby ensuring the company's EPS is in line with future growth expectations.
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The higher the earnings per share (EPS), the more profitable the company is.
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Shares (Basic, Weighted)
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Basic weighted average shares are the weighted average common shares outstanding less the dilution of stock options for a given period.
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They're the shares used to calculate basic earnings per share (EPS).
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To calculate the weighted average of outstanding shares, multiply the number of outstanding shares by the portion of the reporting period those shares covered; do it for each portion then sum the totals.
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To calculate basic EPS, you divide the profit or loss attributable to ordinary equity holders of the parent entity by the weighted average number of ordinary shares outstanding during the period.
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Shares (Diluted, Weighted)
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Diluted weighted shares are used to calculate diluted earnings per share (EPS).
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To calculate diluted EPS, you divide a company's net income minus preferred dividends by the sum of the weighted average number of shares outstanding and dilutive shares.
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Dilutive shares include convertible preferred shares, options, warrants, and other dilutive securities.
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Basic shares is the stock held by all shareholders versus Diluted shares are the total number of shares if the convertible securities of a company were exercised.
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Gross Margin
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Gross margin is the portion of a company's revenue left over after direct costs are subtracted.
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It's one of the most important indicators of a company's financial performance.
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The gross margin formula is:
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Gross Margin = (Revenue – Cost of Goods Sold) / Revenue x 100
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Gross margin is expressed as a percentage.
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A higher gross margin means each $1 of revenue is more valuable to your business IE: if Company A has a 10% gross margin and Company B has an 80% gross margin then Company A will be able to reinvest 10 cents of every dollar of sales back into the company, while Company B will have 80 cents on the dollar.
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Gross margin shows the amount of profits that remain available for meeting fixed costs and other non-operating expenses.
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It's a simple and useful way to understand a company's ability to generate profit from sales before additional deductions such as tax and administrative costs are made.
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EBIT Margin (Earnings before Interest & Tax)
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EBIT margin is a profitability ratio that measures the efficiency quotient for a company's ability to converts its revenue into profit before paying interest and taxes.
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The formula for EBIT margin is: EBIT margin (%) = EBIT ÷ Revenue.
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EBIT stands for "Earnings Before Interest and Taxes", it's also sometimes referred to as operating income.
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EBIT is calculated by deducting all operating expenses (production and non-production costs) from sales revenue.
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Net Profit Margin
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Net profit margin is a financial metric that measures the percentage of revenue left after all expenses have been deducted from sales. It's calculated by dividing net income by revenue and multiplying by 100.
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The net profit margin is intended to be a measure of the overall success of a business.
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It shows the amount of each dollar of revenue flows down to the company's net income.
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Net profit margins vary by industry, but according to the Corporate Finance Institute, 20% is considered good, 10% average or standard, and 5% is considered low or poor.
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EBITDA (Earnings before Interest, Tax, Depreciation, Amortization)
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EBITDA "earnings before interest, taxes, depreciation, and amortization" is an alternate measure of profitability to net income. By stripping out the non-cash depreciation and amortization expense as well as taxes and debt costs dependent on the capital structure, EBITDA attempts to represent cash profit generated by the company’s operations.
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EBITDA is not a metric recognized under generally accepted accounting principles (GAAP).
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The formula for EBITDA is:
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Net Income + Interest + Taxes + Depreciation + Amortization
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Operating Income + Depreciation + Amortization
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EBITDA is useful in analyzing and comparing profitability.
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EBIT (Earnings before Interest & Tax)
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EBIT stands for Earnings Before Interest and Taxes (EBIT is also called operating income).
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It's one of the last subtotals on an income statement before net income.
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EBIT is calculated by subtracting a company's operating expenses from its total revenue.
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Operating expenses include the cost of goods sold, selling, general and administrative expenses, and other operating expenses.
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EBIT does not include non-operating items such as interest expense and taxes.
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EBIT is used to indicate a company's profitability.
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A higher EBIT margin implies lower operating expenses relative to total revenue.
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A low or below-average EBIT margin indicates problems with cash flow and profitability.
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Income (Continuing Operations)
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Income from continuing operations is a line item on an income statement that represents the after-tax earnings a business generates from its regular business activities.
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It's also known as operating income.
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Income from continuing operations is calculated by subtracting all the operating expenses and tax on the operating income.
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The components of income from continuing operations are revenues, expenses (including income taxes), gains, and losses, excluding those related to discontinued operations and extraordinary items.
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Income from continuing operations is important because it excludes discontinued business activities, irregular revenue, and expenses.
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Income (Disontinued Operations)
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Income from discontinued operations is a line item on an income statement that represents the after-tax gain or loss on the sale of a segment of a business.
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It's reported separately from continuing operations and isn't included in operating profit or EBIT.
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The income from discontinued operations is reported below income from continuing operations and before net income.
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Consolidated Net Income/Loss
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Consolidated net income (loss) is the net income (or deficit) of a parent company and its consolidated subsidiaries for a period, after deducting all operating expenses, provisions for all taxes and reserves, and any intercompany transactions or eliminations.
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To calculate consolidated net income, start with each subsidiary's individual net income, add their values together, then subtract any intercompany transactions or eliminations.
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Consolidated net income is a company's total income or loss before preferred stock dividends.
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EPS (Basic Earnings Per Share from Cont. Op.)
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Basic earnings per share (EPS) from continuing operations is calculated by dividing income from continuing operations by the weighted average common shares outstanding during the period.
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The formula for basic EPS is:
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Basic EPS = (Net income - preferred dividends) ÷ weighted average of common shares outstanding during the period
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Income from continuing operations is a net income category that accounts for a company's regular business activities (it's also known as operating income).
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Basic and diluted EPS from continuing operations and net income must be disclosed on the face of the income statement.
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EPS for discontinued operations can be disclosed in the notes to the financial statements.
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EPS (Diluted Earnings Per Share from Cont. Op.)
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Diluted earnings per share (EPS) is a per-share performance measure that includes outstanding common shares and additional common shares that would have been outstanding if the dilutive potential common shares had been issued.
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To calculate diluted EPS, take a company's net income and subtract any preferred dividends, then divide the result by the sum of the weighted average number of shares outstanding and dilutive shares (convertible preferred shares, options, warrants, and other dilutive securities).
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Diluted EPS is more effective for fundamental analysis as it includes the impact of all potential equity diluters therein ensures the company's EPS is in line with future expansion into the industry.
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Diluted EPS from continuing operations must be reported on the income statement.
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EPS for discontinued operations can be disclosed in the notes to the financial statements.
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EPS (Basic Earnings Per Share from Disct. Op.)
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EPS for discontinued operations can be disclosed in the notes to the financial statements.
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Discontinued operations are parts of a firm's operations that have been divested or shut down.
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They're reported on the income statement as a separate entry from continuing operations.
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Income and expenses related to discontinued operations can be found on line items on a company's income statement, below “Continuing Operations Income” and above “Net Income”.
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EPS (Diluted Earnings Per Share from Disct. Op.)
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Diluted earnings per share (EPS) is a measure of a company's profitability.
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It's calculated by dividing the company's net income by the number of shares outstanding (including both common and preferred shares). Diluted EPS gives investors a more accurate picture of a company's earnings per share.
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Entities that report a discontinued operation must present basic and diluted EPS on the face of the income statement for income (loss) from continuing operations and net income (loss).
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EPS for discontinued operations can be disclosed in the notes to the financial statements.
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In financial accounting, discontinued operations refer to parts of a company's core business or product line that have been divested or shut down.
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EPS (Basic Earnings Per Share, Consolidated)
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In consolidated financial statements, EPS measures are based on the consolidated profit or loss attributable to ordinary equity holders of the parent.
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A company reports its EPS in Consolidated Statements of Operations (income statements) in both annual (10-K) and quarterly (10-Q) SEC filings.
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EPS (Diluted Earnings Per Share, Consolidated)
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In consolidated financial statements, EPS measures are based on the consolidated profit or loss attributable to ordinary equity holders of the parent.
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A company reports its EPS in Consolidated Statements of Operations (income statements) in both annual (10-K) and quarterly (10-Q) SEC filings.
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Shares (Diluted, Average)
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Average diluted shares outstanding is the amount of shares outstanding after all conversion possibilities are actuated over the reporting period.
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This measurement is important in understanding the way a company's share price can change if everyone claims their share of stock.
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EBITDA Margin
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The EBITDA margin is a measure of a company's operating profit as a percentage of its revenue.
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The acronym EBITDA stands for earnings before interest, taxes, depreciation, and amortization.
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The EBITDA margin formula is calculated by dividing EBITDA by total revenue.
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EBITDA is calculated by taking sales revenue and deducting operating expenses, such as the cost of goods sold and selling, general and administrative expenses, but excluding depreciation and amortization.
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The EBITDA margin indicates the company's overall health and denotes its profitability.
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An EBITDA margin of 10% or more is generally considered good, it shows that a company is generating a healthy amount of income that can be used to pay off its debts.
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A higher margin implies lower operating expenses relative to total revenue, while a low or below-average margin indicates problems with cash flow and profitability.
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Operating Cash Flow Margin
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The operating cash flow margin is a profitability ratio that measures the amount of money a company generates from its operations per dollar of sales.
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It's calculated by dividing operating cash flow by net sales.
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A high cash flow margin indicates that a business is efficient and doesn't have excess expenses.
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A low cash flow margin could be a sign of inefficiency.
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Operating cash flow margin is different from operating margin, a ratio that uses operating income excluding non-cash expenses like depreciation.
