On the company’s income statement, top line and bottom line are the two most important lines that investors and analysts pay particular attention to.
Income statement is one of the 3 most important financial statements reported by the company to let the stakeholders know the company’s financial performance over a specific accounting period, which is typically for a quarter or year.
In order to know how the company has performed, investors, equity analysts, credit analysts and other market participants, look for changes in the top line and bottom line from quarter to quarter and year to year.
In this article, we will cover;
- What is top-line?
- What is the bottom-line?
- How to know top-line and bottom-line growth?
What is the company’s top line?
Top line of a company refers to the revenue or gross sales of the company. It’s the first line in the income statement. Revenue of a company tells you how much money the company has collected from its customers by selling its products and/or services.
An increase in gross sales or revenue means there is a growth in the top-line of the company for that period in comparison to any previous period.
Also Read: How to calculate price to sales ratio (P/S) to analyse the relationship of sales with price
What is the Bottom Line?
Bottom line of a company means its net earning or profit. You will get this figure at the bottom of the income statement.
Bottom line is calculated after taking out all expenses such as the cost of goods sold (including direct labour and materials), general and administrative costs, depreciation and amortisation charges, interests, and taxes, from the company’s total revenue for a period.
Here is the formula used to calculate company’s bottom line;
Net Income (or Bottom Line) = Gross Sales (or Top Line) – Total Expenses
From an accounting standpoint, the net earnings of the company is transferred to the retained earnings account.
Top line and bottom line growth
Both the top line and bottom line figures are considered as the most useful information in order to know the financial strength of a company.
Top line tells you how the company generates money by selling its products and services.
Bottom line describes how efficiently the company has managed its expenses and margin to earn profit.
Obviously, an increase in revenue of a company will ultimately boost net profit of the company if expenses are managed efficiently.
Bottom line can be increased by following ways;
- By reducing cost of material by finding new suppliers
- By producing products with different input costs or with more efficient methods
- Decrease in wages and benefits
- By utilising operational efficiency of the company
Increase in sales and revenue quarter on quarter (QoQ) and year on year (YoY) is called top-line growth. There are a number of ways a company can grow its top-line.
Top line growth shows how effectively the company has generated sales for the period. It’s a measure used by analysts to know the company’s ability to market and sell its products and services to customers.
More revenue to the company means it can spend more on advertising, marketing, new product development and get into new markets.
However, the operating efficiency can be analysed by calculating bottom line growth.
Here are the most important ways a company can grow its revenue or top line;
- By launching a new ad campaign
- By adding new products that generates additional revenue
- By increase in product prices
- By improving existing product’s quality
- By acquiring another company
- By getting into new geography to sell products
Most profitable companies are those reporting growth in both top line and bottom line continuously year after year.
Also Read: How to calculate Price earnings to growth ratio (PEG)