Revenue is the top of a funnel. Profit is what drips out.
- 602 of revenue can be 61 of profit
- Each step down has its own story: cost, overhead, interest, tax
- Margins compare between companies; absolutes do not
What this is about
"The company made £600 million last year" is one of the most misleading sentences in investing, because it can mean six different numbers. This lesson walks the income statement from top to bottom on a worked example, so the words stop being interchangeable.
The example is Northwind Components, fictional, continued from lesson 1.
The walk down
Revenue 602m what customers paid − Cost of goods sold −361m making the thing = Gross profit 241m 40.0% gross margin − Selling, general & admin −118m sales, offices, management − Research & development −39m building the next thing = Operating income 84m 14.0% operating margin − Interest on debt −11m the lenders − Tax −12m the state = Net income 61m 10.1% net margin
Every line is a different claim about the business, and each answers its own question.
Revenue — did people buy it. Says nothing about whether selling it was worthwhile.
Gross profit — is the product itself profitable, before running a company around it. A software business might show 80% here; a supermarket 25%. Comparing gross margins across industries is close to meaningless; comparing a company to its own history and its direct competitors is where the signal is.
Operating income — is the business as a whole profitable at doing what it does. This is usually the most honest single figure, because it excludes financing choices and tax, which are decisions rather than operations.
Net income — what is left for owners. It is the number headlines use and the one most affected by things unrelated to trading well: a debt refinancing, a one-off tax settlement, an asset sale.
Why the distinction pays
A company can grow revenue and become worse. Suppose next year:
2025 2026 Revenue 602m 710m +17.9% Gross profit 241m 263m +9.1% Gross margin 40.0% 37.0% −3.0pp Operating income 84m 79m −6.0%
Revenue up nearly 18%, and the business earned less. The extra sales were won at lower prices or higher cost. A headline saying "record revenue" would be entirely true and completely misleading — and this is a common pattern, not an exotic one.
Net income can move for reasons that are not the business. If Northwind refinances its debt and interest falls from 11m to 4m, net income rises about 7m with nothing about the operation having changed. Operating income would show that correctly by not moving.
EPS, and the share count
Earnings per share is net income divided by the number of shares. It is what most "beat expectations" headlines refer to.
Two things worth knowing:
EPS can rise while profit is flat. A company buying back its own shares reduces the divisor. Net income unchanged, EPS higher. That is not fake — the remaining owners genuinely own more of the same profit — but it is a different achievement from earning more.
Dilution runs the other way. Companies issuing shares, often to staff, grow the divisor. Profit can rise while EPS does not.
Read EPS alongside net income and the share count, never alone.
What this does not tell you
It does not tell you a high margin is better. Margins are a function of the industry. A retailer at 3% net margin can be an excellent business; a software company at 3% is in trouble. The comparison is against its own history and its close competitors.
It does not tell you profit means cash. Revenue is recorded when earned, not when paid. A company can report record profit while waiting on money that never arrives. That is why lesson 1 puts free cash flow before the price.
It does not tell you a loss is bad. A company deliberately spending on growth can lose money for years and be worth far more at the end. It also might not. The distinction is whether the spending is buying something durable, and that judgement is not in the income statement.
It does not tell you the numbers are honest. They are what the company reported.
Where to see this in the app
Chart → Financials shows exactly the walk above for any company — revenue, gross profit, operating income, net income, EPS and the margins, by year. The whole point of the tab is reading down the column rather than at one number.
The exercise worth doing once: pick a company you already own and read the margin row across four years. Not the revenue row — the margin row. It is the line that tells you whether the business is getting better or busier, and they are not the same thing.
Earnings hub shows reported against expected, which is where a margin squeeze usually first appears in public.