Analysts use both bottom-line growth and top-line growth to evaluate a company’s performance and financial health.
In a company’s income statement, the top-line refers to revenues or gross sales.
The bottom-line of a company is the net profit as it reflects at the bottom of an income statement. Net profit is arrived after all expenses have been deducted from revenues.
In this article, you will learn the difference between bottom-line growth and top-line growth and its use in financial analysis.
What is bottom-line growth?
Bottom-Line Growth of a company refers to the increase in a company’s net profit after all expenses, taxes, and costs that have been deducted from revenues (top line).
Net profit or earnings are often called the bottom line as it appears at the bottom of the income statement or P/L account.
Bottom-line growth indicates how well a company is managing its cost relative to revenue. Strong growth indicates higher operational efficiency, cost management and increased profitability.
If a company’s net profit grows from 1,00,000 rupees to 2,00,000 rupees, then the company has a 100% bottom line growth.
What is top-line growth?
Top-line growth refers to an increase in a company’s revenues.
Revenue is the total income generated from business operations before any expenses are deducted. Revenue of a company is also referred to as gross sales or gross receipts.
Top line growth is calculated by looking at revenue figures over time, in general its quarterly or yearly.
Top line growth shows how well the company has performed in comparison to the past in generating sales and expanding its market presence.
If a company’s revenue increases from 1 Crore rupees to 1.2 Crore rupees in a quarter, then it indicates that the company has a 20% top-line growth quarter on quarter.
In absence of top-line growth, the best and easiest way to increase a company’s bottom-line is through the reduction of expenses.
Difference between bottom-line and top-line growth
| Top Line Growth | Bottom Line Growth |
|---|---|
| Top-line growth is concerned with revenue growth | Bottom-line growth focuses on net profit growth after taking out all expenses from revenue. |
| Top-line growth indicates the company is successful in expanding into new markets, increasing sales, or launching new products. | Bottom-line growth of a company indicates cost-cutting measures, improved operational efficiency, or optimizing pricing strategies. |
| Strong top-line growth but weak bottom-line growth indicates that the company’s expenses are growing faster than its revenues. | strong bottom-line growth and modest top-line growth indicates effective management of costs and achieving higher profitability. |
In addition to top-line growth and bottom-line growth, analysts use different financial tools to analyze a company’s financial health.
