Lessons › Fundamentals and news › Revenue, profit and earnings per share

World 7 · Fundamentals and news · lesson 2 · level 2

Revenue, profit and earnings per share

Revenue is the money a business brings in, profit is what is left after costs, and EPS is the profit for each share.

In one line

Revenue is the money a business brings in, profit is what is left after costs, and EPS is the profit for each share.

Explained simply

Imagine a lemonade stand that sells 1,000 rupees of lemonade in a month. After paying for lemons, sugar and cups, 200 rupees are left: that is the profit. If four friends own the stand equally, each friend's share of the profit is 50 rupees, which is like earnings per share.

The lesson

Revenue, or sales, is the total money a company earns from customers. Net profit is what remains after all costs, interest and taxes, and earnings per share (EPS) is net profit divided by the number of shares. Traders watch how these numbers grow over time and how they compare with what analysts expected. Profit margin, net profit divided by revenue, shows how much of each sale the company keeps.

A worked example

Illustrative example: a company has revenue of 1,000,000. Costs are 700,000, interest 50,000 and tax 50,000, so net profit is 200,000 (1,000,000 minus 700,000 minus 50,000 minus 50,000). With 100,000 shares, EPS is 2 (200,000 divided by 100,000), and the profit margin is 20% (200,000 divided by 1,000,000 times 100). If EPS was 1.60 a year earlier, it grew 25% (0.40 divided by 1.60 times 100).

The same idea at four levels

1. Beginner. Revenue is the money a business brings in from customers.
2. Foundation. Net profit is what is left after all costs, interest and taxes.
3. Intermediate. EPS = net profit ÷ number of shares, so a profit of 200,000 over 100,000 shares is 2 per share.
4. Advanced. Profit margin = net profit ÷ revenue, and year-on-year growth compares a number with the same period a year earlier.
5. Expert. Experts compare results with analysts' expectations and with the company's own history, and they check whether a falling share count is lifting EPS.

Mistakes to avoid

• Confusing revenue with profit.
• Comparing EPS between companies without considering their share counts and share prices.
• Judging one quarter's numbers without comparing them with a year earlier.

Goal of this lesson: Read the key lines of a company's results: revenue, profit and earnings per share.