Top-line and bottom-line - Technical Jargon unleashed

Top-line and bottom-line

Sift through any business newspaper or equity research report and it is unlikely that you will not come across the two words — top-line and bottom-line. Well, though the jargon may sound complex, it points to two simple things that help comprehend a corporate entity’s performance. Top-line and bottom-line refer to nothing but the sales and profit numbers reported by companies. But, if you are still wondering whose line is it anyway, here goes:

Topline


When reporting performance, corporate entities post the period’s sales number as the first entry in the top-line of the income statement. So, generally, when people make remarks on revenue growth of a company they refer to it as ‘top-line growth’. This figure assumes significance as it brings to fore the company’s business prospects. Breaking up the sales figure to know what helped its growth is essential as it would only aid in deciphering whether the increase is sustainable or not. Higher sales can be a result of either increase in volumes (units sold) or increase in realisation. By ‘realisation’, we mean revenue (selling price) made per unit sold.

Again, there could be two scenarios when a company can see higher realisation. One is when the demand for the specific product goes up and the price shoots up on tight supplies and, two, when the company delivers value-added products that command better price in the market over peer products. Top-line growth speaks of how efficient the company has been in exploiting the opportunities in the market.

Bottom-line


The bottom-line or the bottom figure in an income statement is the ‘net profit’ of the company. This is what the company is left with after paying all its expenses (both operating and administrative) for the period reported. A company’s bottom-line generally denotes the efficiency of the management in controlling costs even as it delivers higher sales.

Higher sales in the period will push up net profits, similar to how reduced expense would. In other words, growth in net profits does not necessarily mean fall in expenses; it could be bolstered by higher sales too. Suppose, ‘X’ company registers a 30 per cent increase in sales and a 10 per cent increase in total expenses, its net profit could be higher despite higher expenditure on higher revenues.

That, however, may be the least of the challenges for corporates, as the real big challenge comes during recessionary times like now when demand slumps and so does sales, making reduced or negative growth. Posting profits in such times is possible only through identifying cost-reduction possibilities and reducing operational inefficiencies. In the December quarter of 2008, only a few companies were seen posting bottom-line growth despite a fall in top-line. Few companies such as Siemens, MIC electronics and Cadila Healthcare managed to grow profits despite a fall in sales. However, here again not all cases were examples of operating efficiencies. Some saw profits soar due to higher other income. What’s other income? Well, that’s a different story altogether.