Top-line and bottom-line growth are two critical pieces of a company’s income statement. Each can tell you a lot about where its financial health stands, but the two terms have very different uses. In this blog, we will review what the top line and bottom line are, how they’re calculated, examples of how they could be increased, and how they differ.
The top line refers to a company’s revenues or gross sales. This number will be at the top of a company’s income statement, which is where this term gets its name. The top line can reflect how well a company is performing within its market and how successful its primary business activities are.
A company is experiencing top-line growth when its revenues or gross sales are increasing. There are many methods by which a company could increase its top line, including but not limited to increasing prices, increasing marketing efforts, increasing production, increasing service offerings, or improving upon the existing product offering. As a measurement, top-line growth is generally limited to gauging sales generation and revenue.
The bottom line is a company’s net income and will appear at the bottom of a company’s income statement, hence the name. This figure represents a company’s income after expenses, such as general expenses, loan interest or other debts, income taxes, depreciation, etc., have been subtracted from the top line. You may also hear the bottom line referred to as net profits, net earnings, or net income. When a company’s bottom line decreases, that indicates either an increase in expenses or a decrease in revenues.
When a company grows its top line, its bottom line will also likely grow. However, the key to bottom-line growth is improving overall efficiency and reducing expenses. Ways a company may do this include cutting production costs, reducing overhead, finding cheaper material suppliers, increasing productivity, finding tax benefits, etc. As an investor, bottom-line growth is often a good indicator that the company is increasing efficiencies and decreasing operating costs as it matures.
Top-line growth can show you how good a company is at generating sales and revenue. However, unlike bottom-line growth, it does not take operating efficiencies into account, which can have a significant impact on a company’s bottom line.
While both may be growing at close to the same rate, it’s not uncommon to see a company that is increasing its top line, but its bottom line is staying the same, which means it may still need to improve its processes. Conversely, a company could improve its efficiencies and see bottom-line growth without much change to its top line. Ideally, a company’s bottom line and top line are growing in tandem, and if there is a significant difference between their growth rates for an extended period (five-plus years), that may be a cause for concern.
Both the top line and bottom line are helpful in evaluating the financial strength of a company. As an investor, to get the most accurate view of a company’s financial standing, it’s most effective to look at these two measurements as a pair. Top-line growth paints an outline of the picture, while bottom-line growth fills in the details of the full image.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.