How to analyze revenue of a company for your stock research

Revenue refer to the money that a company gets from doing what it does. Every year, the company has to report its total revenue or sales figure in company’s financial statement.

In a financial statement we have four major parts which can be found in company’s annual report. They are balance sheet, income statement, cash flow statement and statement of shareholder’s equity.

Income statement or PL account of a company shows how much revenue a company earned over a specific period of time.

The first line on the company’s income statement will be an entry of total sales or revenue. There is a difference between profit and sales; you should not get confused with it.

Revenue or sales as mentioned in income statement will state the amount that the company has received by selling its product or by rendering services to its customer, whereas, profit is derived after taking out expenses incurred during the financial year from revenue of the same year.

To derive the net effect of income that business receives during the financial year, we calculate profit, which is essentially the revenue minus expenses or costs of the company.

Business Wise Revenue Analysis

How to analyze revenue of a company for your stock researchAfter getting the revenue figure, you need to categorize it to know how much is generated from company’s core business and how much from non core business.

Incomes like sale of scrap, interest and dividends, forex gains, export inventive and miscellaneous receipts should be taken as revenue from company’s non core activities.

After taking out revenue from non core business, you will be able to judge the growth of the company by comparing revenue from core business with the past performance. One can also compare these figures with other competitor’s revenue figures to know how good the company is in comparison to others in the same industry.

Segment Wise Revenue Analysis

Another way of comparing revenue or sales figure is by doing segment analysis.  Segments are generally shows the revenue that the company has obtained from its presence in different geography.

You can get this information from company’s annual report. To understand the business better, a good practice would be to study the changes in segment wise sales contribution for a company.

If the company is getting a good amount of revenue from new business segments or from emerging markets then it’s a good idea to invest in it as in future it will generate more profit. With this type of analysis you can predict company’s future sales figure if a certain segment is slowing down.

While analyzing revenue you should also concentrate to understand the business better. For seasonal businesses, certain seasons of the year will be more profitable than others where as for cyclical business; the growth of the company depends on the economic growth of the country.

One needs to take these things into consideration while analyzing revenue for investing into stock market.

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