Thursday, July 14, 2022

How to invest - part 1. Preparation - How - Fourth Part

We will be talking about Revenue this time.

What is Revenue?

In short, it is sales or how much you as a company makes from providing a service or product to customer. The more sales you make, the more revenue you generate for the year. 

What is special about Revenue?

Simply put, no revenue, no money in the company. 

And no money, no talk as the saying goes.

No revenue, means there's is profits or cash flow. if a  an organization can't bring in money, it will cease to exist. Heck this is even true for not-for-profit organizations!

But, among other things, revenue also represents the confidence the market has in the business, NOT the price of its stock BUT the amount of sales it makes. 

Take for example, you launch a new product and people, your friends and family, and about the 1000 people on social media thinks it's a good product and the hype drives up your cred - that's price of a stock. But, when people wanna put their money where there mouth is at, that's revenue. The clearest way the market validates your business + products/services is when it buys them, not when it supports you via likes/follows/retweets. 

How I identify Revenue?

It is the first line item in income statement (or profit and loss statement - same thing). It is also called sales, turnover, or income

It is separate from profits - which is revenue minus your costs involved in selling. 


Key points:

Look for growing revenue, whether year over year or quarter over quarter, look for companies with growing revenue. 

But in particular, check to see if the company's revenue growth is equal or more then the revenue growth of the industry it operates in! If it is, the company is growing faster than the market, and by extension, it is eating up its competitors' market share and gaining a stronger foothold in the industry. 

As a corollary, check the industry revenue growth rate too - if you find in the last 3 years the % has been steadily declining, you might be looking at a sunset industry like newspaper, which will eventually shrink in market size and your company, even if it is number 1 will start to see revenue growth slow down and even reduce. 

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