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top   »  economics   »  investment   »  top line vs bottom line

Growth: Top Line vs Bottom Line

 , May 21, 2016 updated on April 06, 2017
Top-line growth is an increase in a firm's revenue or sales.
Bottom-line growth is an increase in a firm's profitability defined as revenue minus all costs. The bottom-line tends to be the more important indicator because it represents earnings that may benefit shareholders.
It is common for startup companies to experience an exponential rate of top line growth for a number of years. It can be difficult to determine whether this will ever translate into bottom line growth. To put it directly, anyone can generate revenue by spending a lot of money. The true test of a firm is whether they can scale their business in a way that makes revenue increasingly profitable.
Consider a firm that grows revenue at 100% and grows costs at 150%. In this situation, the firm is losing money as it grows. Equity analysts will dive into the companies expenses to determine if they are likely to scale. A firm that is developing valuable products or assets such as software may eventually scale. A firm that is just hiring more and more salespeople at a loss to boost revenue isn't necessarily able to scale.
Top Line vs Bottom Line
Top-Line GrowthBottom-Line Growth
DefinitionSales growth before expenses.Growth in earnings defined as revenue less all costs including interest, taxes, amortization and stock based compensation.

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