Profit statements

Revenue vs profit: what’s the difference?

Revenue and profit are two of the most important numbers to focus on for business owners and stock investors. Revenue is the total amount of money the business has earned in a given period; profit is what remains after deducting expenses.

For some companies, profit margins and efficiency are so high that there is not much difference between revenue and profit. For other more capital-intensive companies, a net profit of 2% or 3% is a good year.

Let’s take a look at the key differences between the two numbers, then walk through an example.

Image source: Getty Images.

Key Differences Between Revenue and Profit

The main difference is that income has not been deducted from expenses. Profit (and there are different types of profit) is income minus expenses. It can even be a negative number if the company has lost money.

Revenues and different types of profits are reported in the income statement (also known as the profit and loss account). The statement starts with income on the top line, then goes through the types of expenses before ending with net income or the bottom line.

Let’s go through the different types of profit, starting at the top.

  • Gross profit: The first type of profit is gross profit. Gross margin equals revenue less cost of goods sold. Costs of goods sold vary by industry, but follow the same general concept: they are the direct costs related to sales. For a company like Target (NYSE: TGT), the cost of goods sold would include the cost of inventory and labor hours in stores. A company’s gross margin gives you a good idea of ​​how much it can mark up from its goods or services over the prices it pays suppliers.
  • Operating income : Next on the line is operating profit. Think of operating profit as gross profit less overhead. Most other types of expenses essential to operations, such as rent, administrative salaries, and insurance, are classified as operating expenses. Operating profit shows you how much money the main business is making.
  • Net profit: Net profit is what is left after deducting all other expenses. This includes taxes, interest charges, and one-time items such as legal settlements. These expenses can vary significantly from year to year. Other expenses are also not related to the core activities of the business, so they do not fit into the categories of cost of goods sold or operating expenses. Net earnings (and the earnings per share, or EPS version) is the number most followed by the stock market. Understanding that net profit can be volatile even when gross profit and operating profit are consistent can give you an edge over other investors.

Once you master the evaluation of financial statements, the differences between these numbers will become second nature. As a beginner, the most important thing to keep in mind is that the revenue is the top line number that shows how much money the business has earned during the period. The profit is what remains after the various types of expenses are covered.

Example of revenue versus profit

Let’s look at two companies with very different cost structures, starting with Target:

October 31, 2021 (figures in millions)

Dollar amounts

Percentage

Income

$25,652

100%

Cost of Goods Sold

$18,206

71%

Gross profit

$7,446

29%

Functionnary costs

$5,436

21%

Operating result

$2,010

8%

Other expenses

$522

2%

Net revenue

$1,488

6%

Source: SEC 10-Q.

Target generated $25.7 billion in revenue in the third quarter of 2021. On average, $0.71 of every dollar went to cost of goods sold. This means that on average, the products you bought from Target cost them about 71% of what you paid, resulting in a gross profit of $7.5 billion, or 29%.

Next, $5.4 billion, or 21% of revenue, went to operating expenses. For retailers like Target, it’s normal for overhead to cost a lot less than the direct cost of goods sold.

Finally, taxes and other expenses were $522 million, bringing Target’s net income, net income, to $1.5 billion, or 6% of revenue.

Now let’s look at DocuSign (NASDAQ: DOCU):

December 31, 2021 (numbers in thousands)

Dollar amounts

Percentage

Income

$545,463

100%

Cost of Goods Sold

$115,975

21%

Gross profit

$429,488

79%

Functionnary costs

$432,846

80%

Operating result

($3,358)

-1%

Other expenses

$2,318

0%

Net revenue

($5,676)

-1%

Source: SEC 10-Q.

DocuSign isn’t as big as Target; its quarterly sales were $545 million. About 21% went to cost of goods sold, producing gross profit of $430 million, or 79% of revenue.

Gross profit margin looks great until you see the operating expense number, which was about $3 million more than gross profit. The expenses mean the company posted an operating loss in the quarter equal to around 1% of revenue. Add other expenses and the net loss was $5.7 million.

DocuSign’s business model is completely different from Target’s, and it shows in the income statement. DocuSign sells subscriptions to its valuable software services. Target buys products from other companies, marks them up around 30%, and sells them in physical stores.

Due to this difference in business model, the cost structure is also completely different. Most of Target’s expenses are cost of goods sold, as it has to pay for the inventory it sells. DocuSign’s cost of goods sold is much lower as a percentage of revenue because there aren’t many direct costs associated with each sale.

Operating expenses are the opposite. Target pays the overhead it needs to keep going, while DocuSign invests in overhead. It paid $400 million in that quarter alone in research and development and sales expenses. He invests all of his gross profit in future growth, and the operating loss reflects that.