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📊 Series 7: Understanding Company Fundamentals

Day 3: Understanding Revenue, Profit Margins & Cash Flow

When I first started learning about investing, I used to glance at a company’s revenue and think, “Wow, they make billions! This must be a great company.” But as I learned more, I realized something important — big revenue doesn’t always mean big profits or strong cash flow. Some companies can make huge sales numbers yet still lose money or even go bankrupt. That’s why understanding revenue, profit margins, and cash flow is one of the most powerful skills an investor can have.

In this lesson, I want to break these concepts down in a simple and practical way. Once you understand how they connect, you’ll see companies very differently — not as “popular names,” but as living, breathing businesses with money coming in and going out.

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🧾 What Exactly Is Revenue?

Revenue is the total amount of money a company earns from selling its products or services before deducting any costs. It’s the “top line” in the income statement — the starting point of a company’s financial story.

Think of revenue as your salary before any deductions. If you earn $5,000 a month, that’s your revenue. But after rent, bills, and food, your real earnings look very different — and that’s exactly what happens to companies too.

There are usually two main types of revenue:

1. Operating Revenue: Money made from a company’s main business (like Apple selling iPhones or McDonald’s selling burgers).

2. Non-Operating Revenue: Income from secondary activities (like investment returns or property sales).

When analyzing a company, I always focus on operating revenue because it shows how strong their core business really is.

📉 The Truth About Revenue Growth

A company’s revenue might be growing every year — and that looks great on paper. But I always ask: Is it growing profitably?

For example, imagine a company that sells $1 million worth of products this year but had to spend $1.2 million to achieve that. They have strong revenue, but they’re still losing money.

Revenue growth is exciting, but it must be sustainable. A good investor always checks:

• Is the company spending more than it earns to chase growth?

• Is it relying too heavily on discounts, debt, or short-term promotions?

• Is customer loyalty driving the growth, or is it just marketing hype?

When you find a company with growing revenue and improving profitability, that’s when things get exciting.

💰 Profit: The Real Measure of Success

If revenue is the “top line,” then profit is the “bottom line.” Profit is what’s left after all expenses — salaries, rent, raw materials, taxes, and interest — are paid.

There are three main types of profit every investor should understand:

1. Gross Profit: Revenue minus the cost of goods sold (COGS). It tells us how efficiently the company produces or delivers its products.

2. Operating Profit (EBIT): Gross profit minus operating expenses. This reflects how well the company runs its daily business.

3. Net Profit: The final number after taxes and interest — the true “bottom line.”

A company can have strong revenue but weak profits. That’s like working 80 hours a week and still barely saving anything. So when I analyze a company, I don’t just look for sales growth — I look for profit growth that’s consistent and improving over time.

📊 Understanding Profit Margins

Profit margins tell you how much profit a company keeps from each dollar of revenue.

Here’s how they work:

• Gross Margin = (Gross Profit / Revenue) × 100

• Operating Margin = (Operating Profit / Revenue) × 100

• Net Margin = (Net Profit / Revenue) × 100

A company with high profit margins means it can sell its products at a premium or operate very efficiently. For example, tech companies like Microsoft or Google have high profit margins because they sell digital products that cost very little to reproduce.

But companies with thin margins — like airlines or supermarkets — operate in highly competitive industries. They have to fight hard for every dollar.

When you see margins improving year after year, that’s a good sign. It means the company is managing costs better or increasing prices successfully — both strong indicators of good management.

💧 The Lifeblood of Business: Cash Flow

Now, here’s the part most beginners ignore — cash flow.

Cash flow is the actual money moving in and out of a business. It’s what keeps the lights on and pays salaries. Even profitable companies can collapse if they don’t have enough cash to run their operations.

There are three types of cash flow you should know:

1. Operating Cash Flow: Cash generated from the company’s main business operations.

2. Investing Cash Flow: Money used for buying or selling assets, equipment, or investments.

3. Financing Cash Flow: Money from borrowing, paying debts, or issuing shares.

A company with strong operating cash flow is healthy because it generates real money from its business. If it’s always relying on borrowing or selling shares for cash, that’s a red flag.

🧠 Connecting the Dots: Revenue, Profit, and Cash Flow

Here’s how these three work together:

• Revenue shows the potential of the business.

• Profit shows the efficiency of the business.

• Cash Flow shows the sustainability of the business.

A truly strong company will have all three growing steadily. But if one lags behind — for example, rising revenue but shrinking cash flow — I dig deeper. It might mean the company’s collecting payments slowly or overspending to grow.

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📚 A Simple Example

Let’s say there’s a coffee chain called “Bean Empire.”

• Revenue: $1,000,000

• Cost of Goods Sold: $400,000

• Operating Expenses: $300,000

• Taxes & Interest: $100,000

That gives:

• Gross Profit = $600,000

• Operating Profit = $300,000

• Net Profit = $200,000

• Net Profit Margin = 20%

If their operating cash flow is $180,000, it shows the business is healthy — they’re generating real money close to their profits.

But if their cash flow was only $20,000, I’d worry. That could mean customers aren’t paying on time, or the company is holding too much inventory.

🔍 How I Use These Numbers as an Investor

When I evaluate a company, here’s the checklist I use:

1. Revenue: Is it growing consistently over several years?

2. Gross Margin: Is the company managing its production costs well?

3. Operating Margin: Are expenses being controlled as the business grows?

4. Net Margin: Is the company making enough profit after all costs?

5. Operating Cash Flow: Is there enough real cash coming in to support growth?

This simple framework helps me filter out flashy companies and focus on solid businesses with a strong foundation.

🧩 Why These Metrics Matter More Than Stock Prices

Many beginners chase stock prices without understanding what drives them. But here’s a truth I’ve learned — stock prices follow earnings and cash flow in the long run.

A company with strong and consistent revenue, profit, and cash flow will eventually see its share price reflect that. The market may fluctuate in the short term, but fundamentals always win in the end.

When I invest, I’m not buying a stock. I’m buying a piece of a business. So I want to be sure that business has solid financial health.

💬 My Personal Takeaway

Understanding revenue, profit margins, and cash flow changed how I view investing. I stopped seeing stocks as “ticker symbols” and started seeing them as real companies with real money flows.

This mindset shift helped me:

• Avoid hype-driven stocks.

• Identify undervalued businesses.

• Build long-term confidence in my investments.

I encourage you to start reading a few annual reports or earnings summaries. Even if you don’t understand everything at first, you’ll start noticing patterns — and that’s how financial literacy grows.

Final Takeaways

As investors, our goal isn’t to chase the next big trend. It’s to understand what makes a business strong from the inside out. Revenue tells us how much the company earns. Profit shows how much it keeps. Cash flow tells us whether it can survive and grow.

Master these three, and you’ll never look at investing the same way again.

Call to Action:
If today’s topic opened your eyes, take 10 minutes to look at the latest financial report of a company you admire. Check its revenue growth, profit margins, and cash flow trends. See how they connect — and ask yourself, “Would I own this business if it weren’t a stock?”

Because true investors don’t buy prices. They buy businesses that last.

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DISCLAIMER

I make no representations, warranties, or guarantees, whether expressed or implied, that the content provided is accurate, complete, or up-to-date. Past performance is not indicative nor a guarantee of future returns.

I am an individual content creator and not regulated or licensed by the Monetary Authority of Singapore (MAS) as I do not provide investment services.

All forms of investments carry risks, including the risk of losing your entire invested amount. Such activities may not be suitable for everyone. You are strongly encouraged to seek advice from a professional financial advisor if you have any doubts or concerns.