Revenue vs. profit

Revenue — also called the top line or sales — is the total amount a company billed its customers over a period. Profit is what remains after paying for everything required to produce those sales.

Between the two sit several stages, and each one answers a different question.

The stages, in order

1. Revenue. What customers paid. Says nothing about whether it was worth producing.
2. Gross profit (revenue minus cost of goods sold). What is left after the direct cost of making the product. As a percentage, this is gross margin, and it tells you about pricing power.
3. Operating income. Gross profit minus the cost of running the business — research, sales, salaries, administration. This is the profitability of the actual operation.
4. Net income. After interest on debt, taxes, and anything else. This is the bottom line, and it is the one that becomes earnings per share.

Why revenue growth alone can mislead

A company can grow revenue indefinitely by selling at a loss. Several famous businesses have done exactly that. Revenue growth is only meaningful alongside what happens to margin as the business scales.

GAAP and non-GAAP

You will see two versions of profit. GAAP figures follow standardised accounting rules. Non-GAAP or "adjusted" figures are the company's own preferred presentation, typically excluding certain costs — most often share-based compensation.

Non-GAAP profit is almost always higher than GAAP profit, because the adjustments generally remove expenses. When you see the opposite — GAAP above non-GAAP — something is being added under GAAP, usually gains from outside the operating business. That is worth investigating rather than celebrating.