Revenue is vanity, profit is sanity(1 min read)

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This is post 3 of 6 in the series “Finance 101”

  1. The house that taught me enterprise value
  2. The three prices of a house
  3. Revenue is vanity, profit is sanity(1 min read)
  4. Follow the cash
  5. The price tag on earnings
  6. How much of the house is mortgaged

Revenue is the least honest number in finance. Ask this instead. After the sale, what’s actually left?

Revenue is the total value of everything a company sold. That’s the top line. But selling a lot means nothing if it costs even more to sell it. A company can sell a billion dollars and still lose money.

Gross profit is what’s left after the direct cost of making the thing. That means the lemons and the sugar, not the rent. Software often keeps 70 cents of every dollar. Supermarkets may keep only 25. Both can be fine businesses. It depends on the volume.

Operating income is what survives salaries, rent, marketing, and research. It shows whether the core business actually works. Net income is the famous bottom line. It comes after interest and taxes. It’s real. But it’s also the easiest number to fudge with one-time tricks.

Revenue tells you how big the machine is. Profit tells you whether the machine works. Always read both.