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What is Revenue?

Interpreting revenue in income statement

Revenue is the total amount of money received by a company within a fixed period. In KLSE, a company has to report their revenue quarterly, which is every 3 months.

In simpler term, revenue is basically the total sales money obtained. It can be obtained by multiplying the price of goods sold with the numbers of goods sold. Assuming company A sold out 1000 units of cars in the last quarter at a price of RM50,000 each. Then the revenue of the company for the quarter will be RM50,000,000 (1000 units x RM50,000/unit).

Revenue is the profit that a company gained, without deducting any expense, such as cost of goods sold, taxes, interests, employees salary, and etc.Hence, revenue is the most “top line” of income of a company. Expenses and costs will then be deducted on revenue to find out the net profit of a company business.

To ease your understanding, you may imagine revenue is the salary you received monthly. After receiving a salary of RM3,000 (revenue), you now have to pay income tax, EPF, SOCSO (tax). Then you have to pay for electricity bill, car petrol, WIFI charges, cost of meals (expense). In the end, you might have RM1,000 left (net profit). The same goes to a company, where expenses have to be deducted from revenue. So, revenue – (tax + expense) = net profit.

Myth: Higher revenue equals to better profitability?
Answer: If the total expenses remain unchanged, yes. Else, no. Net income reflects a company's profitability better as it takes into consideration of expenses.

Consider the following case:
Company X
Company Y
Revenue = RM10,000,000Revenue = RM 900,000
Total Expenses = RM9,500,000Total Expenses = RM200,000
Net profit = RM500,000 (10mil – 9.5mil)Net profit = RM700,000 (900k-200k)

Looking at the table, we can clearly see that company X has a much higher revenue that company Y. As first impression, we will definitely think that Company X is doing much better and earning much more than Company Y. However, after deducting the total expenses, we can see that company Y has a higher net profit! This is why sometimes char keow teow uncle can earn more than you think! Haha. This table also proves that we could not solely judge a company’s profitability through its revenue. This is because a company that has high revenue, does not necessarily have a high net profit in the end. Instead, net income provides more accurate number.

Nevertheless, for a simple business, revenue allows us to determine the numbers of goods that have been sold in a period of time. An increase in revenue hence means that the company is actually selling out more products that it used to. This is also a good sign because it indicates that the company’s products are more and more popularly bought by customers.

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