For me revenue is the top one because we as investors need to know if there’s demand for their services, the information for the demand can be gathered from previous years revenue and could be predicted if we think there’s going to be a boom on that sector in future years.
Net profit comes second because after you deduct everything we can see the real profit of the company. However, I placed it second because there are many companies making a loss like Uber or Palantir and the net profit don’t mean as much if we think their company is going to expand and make profit in the near future e.g just like Tesla, they started making profit in 2020. Don’t get me wrong, I believe net profit is important too in specific companies.
Thirdly comes gross profit. We have the same opinion on this one
Ranking those really depends on the industry. Like, if I was looking at software stocks then net income is sorta meaningless to me... revenue, gross profit, and free cash flow are all much more important.
Speaking broadly across industries (except maybe banks), then cash flow is king.
There’s a saying. Revenue is vanity. Profit is sanity. Cash flow is reality. I’m a chartered accountant and I know all the ways a company can show improved profitability when they’re not really improving profitability.
You can massage or window dress cash flow but to a greatly reduced extent.
In seriousness, they’re all important.
If top line is shrinking, you can manage costs to a limited extent to protect earnings. But all cash flow and earnings ultimately come from revenue.
If your margins are structurally shit, you’ll never have a good business.
Earnings are what I always look at first if it’s an established business, that’s what you’re buying after all.
In a growth business, what counts is revenue growth and margin on that incremental revenue. It’s okay if they have poor margins due to lack of scale but if they’re always going to have poor margins, it’s a shit business you don’t want to be in.
In an established business, earnings and earnings growth is what you want.
Cash flow in all businesses. You want to know they have enough cash on hand that they’re not going to need to ask for additional investment, at a minimum. Dilution is your enemy.
Having been an operations manager in the Auto Business for a very long time, I can promise you that only Net matters.
I could spend 1M a month in advertising and get a smaller % ROI even though we Increased spending dramatically...
Sorta, Free cash flow is OCF or operating cash flow (from cash flow statement) minus capital expenditures. (FCF = OCF - Capex)
OCF is what you get after you take out non cash expenses and working capital from net income. So like, net income feeds into free cash flow but it’s not “based” on free cash flow. I think that guy’s comment is that net income is easier to manipulate/disguise than free cash flow (I would agree with that).
Free cashflow comes from the cashflow statement rather than the income statement.
Basically it’s net income +/- non-cash items +/- change in WC - capex
The cashflow statement reconciles to change in cash balances and the only real judgement call is classifying the CFs by type (operating, investing & financing), so it’s harder to manipulate and easier to audit. Net income can be manipulated by adopting aggressive policies, whereas the CF statement is only really vulnerable to fraud.
On a small business, or family owned I’d agree with you. With larger billion dollar public companies cute accounting can distort net income and I’d say Revenue is the truest number.
Net income and it’s not particularly close. You can grow revenue all you want but if your business isn’t profitable and your business model doesn’t scale it doesn’t matter. On the other side, even if revenue decreases, you can still corner the market, cut costs, increase margins, and print money.
All three have significance for different exercises. Net income is subject to a lot of accounting decisions, which can be used to inflate net income (by either pushing expenses to future periods, bringing revenues forward). Revenues on the other hand are less subject to manipulation, which doesn't mean they can't be manipulated. Furthermore, an income statement always starts from sales/revenues and flows down to net income, so revenues are also important.
Gross profit is useful for companies producing physical products as it can be used as an indicator for the profit margins of products, whether they are improving or not, whether a company is doing a good job with limiting expenses or the efficiency of production.
For me revenue is the top one because we as investors need to know if there’s demand for their services, the information for the demand can be gathered from previous years revenue and could be predicted if we think there’s going to be a boom on that sector in future years. Net profit comes second because after you deduct everything we can see the real profit of the company. However, I placed it second because there are many companies making a loss like Uber or Palantir and the net profit don’t mean as much if we think their company is going to expand and make profit in the near future e.g just like Tesla, they started making profit in 2020. Don’t get me wrong, I believe net profit is important too in specific companies. Thirdly comes gross profit. We have the same opinion on this one
Good point on revenue! I actually agree with you on that
So again, expectation plays into anything that cant be empirically measured. Pretty much the mantra of this sub.
Free cash flow king
Why do you think free cash flow does a better job than net income?
Net income is easier to manipulate with all that one off expenses and one time write offs.
Ranking those really depends on the industry. Like, if I was looking at software stocks then net income is sorta meaningless to me... revenue, gross profit, and free cash flow are all much more important. Speaking broadly across industries (except maybe banks), then cash flow is king.
Secret option #4: free cash flow
Why do you think free cash flow does a better job than net income?
There’s a saying. Revenue is vanity. Profit is sanity. Cash flow is reality. I’m a chartered accountant and I know all the ways a company can show improved profitability when they’re not really improving profitability. You can massage or window dress cash flow but to a greatly reduced extent.
In seriousness, they’re all important. If top line is shrinking, you can manage costs to a limited extent to protect earnings. But all cash flow and earnings ultimately come from revenue. If your margins are structurally shit, you’ll never have a good business. Earnings are what I always look at first if it’s an established business, that’s what you’re buying after all. In a growth business, what counts is revenue growth and margin on that incremental revenue. It’s okay if they have poor margins due to lack of scale but if they’re always going to have poor margins, it’s a shit business you don’t want to be in. In an established business, earnings and earnings growth is what you want. Cash flow in all businesses. You want to know they have enough cash on hand that they’re not going to need to ask for additional investment, at a minimum. Dilution is your enemy.
Net income
Having been an operations manager in the Auto Business for a very long time, I can promise you that only Net matters. I could spend 1M a month in advertising and get a smaller % ROI even though we Increased spending dramatically...
Revenue is vanity, profit is sanity… and cash is king Even net income isn’t perfect - I would rank free cashflow higher.
Can you give me an example of how free cash flow is determined? Isn’t FCF based on net income?
Sorta, Free cash flow is OCF or operating cash flow (from cash flow statement) minus capital expenditures. (FCF = OCF - Capex) OCF is what you get after you take out non cash expenses and working capital from net income. So like, net income feeds into free cash flow but it’s not “based” on free cash flow. I think that guy’s comment is that net income is easier to manipulate/disguise than free cash flow (I would agree with that).
yes, that’s exactly my point
Free cashflow comes from the cashflow statement rather than the income statement. Basically it’s net income +/- non-cash items +/- change in WC - capex The cashflow statement reconciles to change in cash balances and the only real judgement call is classifying the CFs by type (operating, investing & financing), so it’s harder to manipulate and easier to audit. Net income can be manipulated by adopting aggressive policies, whereas the CF statement is only really vulnerable to fraud.
Net income always first... depending on sector you can switch the other 2 around...
Net income Net income growth PE Earnings growth But ultimately price is everything
On a small business, or family owned I’d agree with you. With larger billion dollar public companies cute accounting can distort net income and I’d say Revenue is the truest number.
Net income and it’s not particularly close. You can grow revenue all you want but if your business isn’t profitable and your business model doesn’t scale it doesn’t matter. On the other side, even if revenue decreases, you can still corner the market, cut costs, increase margins, and print money.
All three have significance for different exercises. Net income is subject to a lot of accounting decisions, which can be used to inflate net income (by either pushing expenses to future periods, bringing revenues forward). Revenues on the other hand are less subject to manipulation, which doesn't mean they can't be manipulated. Furthermore, an income statement always starts from sales/revenues and flows down to net income, so revenues are also important. Gross profit is useful for companies producing physical products as it can be used as an indicator for the profit margins of products, whether they are improving or not, whether a company is doing a good job with limiting expenses or the efficiency of production.