The bottom line is a figure that appears at the end of a company’s income statement that shows whether it had a net profit or loss over a certain period. Essentially, it tells you if the company was profitable for the reporting period.
Definition and Examples of the Bottom Line
The bottom line refers to a company’s net income, which appears at the end of the income statement. If total expenses exceed revenue for the reporting period, the bottom line will show a net loss. If revenue is greater than total expenses, the bottom line will show positive net income.
Understanding a company’s bottom line is vital if you’re analyzing financial performance. However, it isn’t the only metric you should consider as an investor.
An income statement is commonly referred to as a profit and loss statement. Along with the balance sheet and the statement of cash flow, it’s a key document used to assess financial performance.
To better understand the bottom line, let’s take a look at Amazon’s income statement from its 2020 fiscal year, which ended Dec. 31, 2020. Amazon’s net income nearly doubled to $21.3 billion during fiscal 2020 compared to around $11.6 billion for fiscal 2019.
Amazon’s improved bottom line for the year reflects a dramatic increase in revenue. Net sales rose by 38%, largely due to increased demand for household staples as the pandemic forced customers to spend more time at home. An improved bottom line is often (but not always) cheered by investors.
In the example above, Amazon’s improved bottom line had a relatively muted effect on its share prices. On Feb. 2, 2021, the day Amazon released its full earnings report for 2020, its share price closed just over 1% up from the day before.
The stock market is what’s known in economics as a leading indicator. Investors base their decisions on their predictions for the future, rather than what happened in the last year or quarter. That’s why improvements to the bottom line don’t always cause share prices to skyrocket.
In the case of Amazon, investors were likely reacting to a number of factors beyond the bottom line. For example, management’s guidance highlighted substantial uncertainty due to the pandemic and projected around $2 billion in costs related to COVID-19 for Q1 of 2021. On the same day Amazon released its financial performance, the company also announced that founder Jeff Bezos planned to resign from his role as chief executive officer.
How the Bottom Line Works
The bottom line is the amount of money left after you subtract expenses from revenue. If the bottom line is positive for a reporting period, the company has net income. If it’s negative, the company has a net loss.
To calculate the bottom line, start with the total revenue a company generated from selling its goods or services during a year or quarter. Sometimes total revenue is referred to as the top line. Next, deduct the cost of goods sold to arrive at the gross profit.
Next, calculate operating expenses, which include things such as rent, utilities, and overhead. Subtracting operating expenses from gross profit gives you the company’s pre-tax income for the period, which is often referred to as earnings before interest and taxes, or EBIT. Finally, subtract taxes and interest on debt. The resulting net income or net loss is the bottom line.
What It Means for Individual Investors
The bottom line is important to investors because it shows whether a company is making a profit or losing money. It can be especially helpful to your investment decisions when you can analyze whether a company’s bottom line is improving or getting worse over time.
However, the bottom line isn’t the only metric you should consider if you’re deciding whether to buy or sell a stock. Many investors believe in the EBIT method, or its corollary, the EBITDA (earnings before interest, taxes, depreciation, and amortization). Stripping away interest, taxes, depreciation, and amortization allows investors to focus more on what a business is earning from its regular operations.
In recent decades, the concept of a triple bottom line has gained traction among those interested in sustainable investing. The idea is that companies should look beyond the bottom line and focus on the three Ps: people, the planet, and profits.
It’s essential to remember that past performance never guarantees future results, so you don’t want to invest solely on the basis of a company’s bottom line. You should only invest if you believe a company is well-positioned to deliver profits moving forward.
- The bottom line is literally the last line entry on a company’s income statement. It shows whether a company generated net income or a net loss for the accounting period.
- A positive bottom line shows that revenues exceed expenses for the reporting period, meaning the company earned a profit.
- A negative bottom line shows the company lost money for the period.
- While the bottom line can be a useful metric for investors, it does not offer a full picture of a company’s financial performance or future success.