Top Vs. Bottom: Which Line Matters Most?
October 20, 2009 by Tisa Silver
Filed under Finance
Yahoo! (YHOO) surprised Wall Street when it reported its third quarter earnings.
The Internet company’s profits tripled versus the same quarter last year, however revenue fell 12 percent.
The stock lost about a nickel during the regular trading session prior to releasing the news. In after-hours trading, shares have risen 5 percent so far.
Photo by gaku., courtesy of flickr
Looking at Yahoo’s figures is interesting because of the conflicting movements of the top and bottom line.
Yahoo’s top line has fallen for the third straight quarter, so that means revenue has been shrinking, but profits rose dramatically. Which line matters most: top or bottom?
The top line shows revenues and the bottom line shows what is left after all costs are deducted from revenues. The difference is the company’s profit (or loss).
There are three ways to increase profits: increase revenue, cut costs or a combination of both. In the long-run, how much cost-cutting can a company really do to lessen the impact of dwindling revenue without detriment to the business?
BTW – Maximizing shareholder value is the goal of financial management, not maximizing revenues or maximizing profits, but having a large amount of both can definitely help.
The short answer is that management must watch both numbers and grow both numbers. It does no good to grow to top line if the company becomes bloated and inefficient and costs eat up profits. Conversely, excessive cost cutting can weaken a company’s ability to satisfy their customer’s needs and the business will erode.
Thanks Jim, the balance between growing sales and keeping costs reasonable is proving to be a difficult one for many large companies to attain.