Often analysts and proprietors get into the top line and bottom line profitability growth figures. What are they talking about?
To understand this, refer to any financial statement, for example — Ashok Leyland
Top line refers to gross sales or total income from operations generated by the company in a given period (i.e. this is the first line item in the key financial figures table). Bottom line (i.e. Net Profit Margin) on the other hand refers to the Profit After Tax (PAT) (i.e. the last line item in the same table). In other words, top line signifies overall growth and expansion of the business while bottom line highlights the percentage of that growth which is attributable to the shareholders or owners of the business after paying for all the costs of operating the business such as salaries, expenses, raw material costs etc.
Growth in the top line may not always get reflected in the bottom line. When a company is in its expansion mode, it is trying to achieve greater growth in total sales. In the process it incurs additional expenses related to higher wages, marketing, advertising, distribution costs etc. The result is a lower PAT.
The bottom line highlights the efficiency with which the company operates. Keep in mind that certain industries or companies (or verticals of businesses within the same company) operate with very low margins and even a really healthy top line does not translate into good profitability numbers for the shareholders. On the other hand, some companies which operate with very little expense report very healthy profitability for their shareholders, even though their overall or gross sales may not be as healthy as companies operating in other sectors.
Example — for cinema companies like PVR, Inox etc – while ticket sales are the main revenue driver adding maximum (in percentage terms) to the overall sales, pop corn, beverages and other nik-naks you get on the food counter are good for net profit, due to the low expense associated with this segment of sales. Most of these food items are simply procured from a third party vendor and sold at a higher price inside the auditorium.
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