Aside from profit, one of the most important financial ratios is the revenue (sales), that is, the funds the company obtains from different sources. These can be sales revenues, customers deposits, or even capital investments. Investors need to know what kind of revenues the company gets, and how significant they are, that is why revenue is the next line of the income statement one needs to look at after analyzing the bottom line where earnings per share stand.

Undoubtedly, the absolute value of the company’s revenue is extremely important but there is one more significant issue. Suppose, the revenue of Amazon.com has grown 70%, as compared to the same period in the previous year. Thus, the relative revenue indicator, that is, the change as opposed to the previous period, is also important.

There is more to consider. Revenue growth is good but it does not necessarily mean an increase in profit. A following case can be used to exemplify this statement: someone got a 70% pay raise but was sent to live on Mars where the cost of living is 79% higher, in which case his real income does not increase.

Analysts always take into account this circumstance when analyzing the reports of the companies similar to Amazon.com. They do not only note a 79% revenue growth, but the way this money was spent. If it was used to boost capacity and improve service quality, this is a good sign for the company’s prospects. If additional income was only utilized to raise staff salaries, without any real impact on production output of goods or services, this is bad news for investors.

Traders and analysts can “forgive” Amazon.com the quarterly loss of $0.25 per share if they see that revenue has grown 79%, and these additional funds were sensibly used, that is, spent on the development of infrastructure that will enable the company to speed up customer service as well as improve its quality.
Investors need to pay attention to the line in the income statement called extraordinary or non-recurring events. One can often see in the news that the company’s earnings totaled, say, $0.08 per share, excluding non-recurring charges. To understand the message one can draw a simple analogy. Suppose a person makes $120,000 annually. This year this person had unexpected luck winning $12,000. His annual income has consequently risen to $132,000 ($120,000 + $12,000), but his winning in a lottery was a one-time event, and fortune is unlikely to smile on him a second time next year.

In the compilation of annual reports, accountants also use the rule of separate accounting for non-recurring (one-time) events, If Amazon.com had acquired Hallmark to simplify its packaging procedures, it would have had to pay for the purchase out of its earnings, subtracting it from the amount in the bottom line of the income statement where net income is indicated. It would therefore be wrong to say that Amazon earned less – it just incurred an acquisition expense. These extra expenditures do not mean that the company did not meet analysts’ expectations and are considered separately, as “extraordinary events” or “items”.

Another example. When Intel reported the latest quarterly results, it mentioned that a certain proportion of the profit was received at the expense of the capital investment. This news caused concern on Wall Street as these investments were not related to the company’s core business, chip production, and therefore could not be assessed as a stable source of income. Analysts and trader invariably tread with caution when a company gets its income from a source unrelated to its core operations.

To sum it up, profit and revenue are the two main figures in the company’s income statement, and an understanding of the line “extraordinary or non-recurring items” will allow a budding investor to interpret correctly the reports of the corporate quarterly earnings.