The top line and bottom line of an income statement are two numbers that analysts and investors closely monitor. Both figures help to determine how financially healthy a company is, but it’s essential to understand the context of these numbers before assigning them value. So what’s the difference between bottom-line growth and top-line growth?
What is Top Line Growth?
Top-line growth is a company’s gross revenue from all sales during a statement period. It does not show how profitable the company was, but rather the total price of all goods and services that were sold in that period.
Top-line growth is placed atop the income statement because subsequent lines will show expenses and deductions that must be factored in to determine net income. Capital losses on capital assets can be deducted, as well as any costs incurred for the production of goods and services. In addition to expenses and capital losses, taxes are also deducted from this number.
A steadily growing top line shows an increase in the number of sales, but an increase in sales does not always equate to a rise in profit. To discover how much a company made after all expenses are added up, you look to the bottom line.
What is Bottom Line Growth?
Bottom line growth shows how much money a company made after all deductions and expenses have been accounted for. Therefore, the bottom line of the income statement shows a company’s net income for a given period. This number combines a company’s ability to generate sales, as well as how efficient they are in their process.
Growth in the bottom line shows steadily increasing profits, which is to be expected from a successful company. With steady profits comes predictable and ever-growing dividend payments to investors. From an accounting perspective, the bottom line does not carry over from one income statement to the next.
Top-Line Growth vs. Bottom-Line Growth
While the bottom line tells more of a complete story when it comes to a company’s finances, top-line growth should not be ignored. A steadily growing top line can lead to an expanding amount of profit over time. As a company grows, it should become more efficient and find ways to reduce expenses.
A company that is in its early stages may incur more expenses to become profitable compared to a well-established company. A well-run organization with a long history has likely discovered manufacturing processes that increase efficiency, putting systems in place that continually increase economies of scale. These processes continually increase the bottom line over time.
But a company that is still establishing itself may have to spend more money on marketing, technology, and machinery in order to ramp up production. Younger companies are still figuring out what systems work for them and may show weak bottom-line growth as a result.
Companies can naturally increase their bottom line by finding cheaper ways of making their products and maximizing their supply chain efficiencies. Examples of this could be finding a new supplier of components with lower costs or discovering manufacturing processes that lower expenses. Some companies may show a lower than expected bottom line due to one-time capital expenses on machinery, which will eventually reduce the cost of production significantly. These types of expenses may shrink the bottom line for one year, but substantially increase it in following years.
If economies of scale cannot be put into place to grow the bottom line, a company may sometimes resort to decreasing wages by laying off part of its workforce, as well as reducing benefits.
Growth in the top line is still important to monitor because it shows consumer appetite for a company’s goods and services. Over time, an increase in the top line can lead to a rise in the bottom line as processes become more efficient. But if a company has repeatedly increased growth in the top line without a corresponding increase in the bottom line, there may be something inherently wrong with how the organization is run.
The other side of the coin is that a well-established company may show very little top-line growth due to being in a mature market. But even with a static top line, highly profitable organizations can steadily increase their bottom line by becoming more efficient. The most successful companies will steadily increase both the top and bottom line of their income statement from period to period.
Ultimately, the bottom line provides a much more descriptive number than the top. Ideally, a company can show an increase in both numbers over a period. A business with both a growing top line and a growing bottom line has likely not yet reached its earning potential. Pay attention to the market that these companies are in to determine when top-line sales may level off. When the top line does level off, it is important to watch to see if net profits levels off as well.
Bottom Line Growth Distributions
Companies have many different options for what to do with their bottom-line net earnings. A company may choose to take their bottom line and increase dividend payments to shareholders, or it can use the bottom line to reinvest in itself. Examples of reinvestment include buying back stock or using the extra money for product development or expansion.
An Example of Top and Bottom Line Growth
Let’s look at one of the largest companies in the world, Amazon, for an example of what top-line and bottom-line growth can look like.
On Amazon’s income statement, the top line is titled “Total Revenue” and equaled $280,522,000,000 on 12/31/2019. The income statement shows the total revenue for 2018 at $232,887,000,000 and in 2017 it was $177,866,000,000. The next two lines are “Cost of Revenue” and “Gross Profit,” which help to further identify how successful the company was. The lines following those add up all expenses and taxes before arriving at the bottom line, “Net Income.”
In 2019, Amazon had a net income of $11,588,000,000. That was up from 2018 at $10,073,000,000 and 2017 at $3,033,000,000.