Bottom Line

  

If you’re the type that likes to tell long-winded stories, your friends might frequently ask, “Will you get to the bottom line?” Although, uh...there might be a few four-letter words thrown in there for effect.

In the finance world, the bottom line refers to the profit shown at the end of a company’s income statement that subtracts total costs from total revenue. It could be labeled as "net income" or "earnings per share."

If a company is not happy with its bottom line at the end of a month, quarter, or year, it has two choices: reduce costs or increase revenue (or both). Reducing costs could mean the painful experience of having to lay off employees, or trying to lower the cost of raw materials or administrative expenses. (Say good-bye to free coffee.)

As this tactic alone often results in a downward spiral, many decide it’s time to find new markets, introduce new products, sell properties, increase prices, or expand overseas in order to increase revenue. And if a bottom line is positive, the company could use the profit to issue a dividend, buy back stock, invest in new equipment, pay back loans...or bring back the free coffee.

Related or Semi-related Video

Finance: What is Earnings Quality?50 Views

00:00

Finance allah shmoop What is earnings quality Well it's just

00:07

math right Whatever Dot com just produced a dollar thirty

00:10

two in earnings One hundred thirty two cents of wall

00:13

street Love and profit How can there be a quality

00:16

to that number The number is a number right Well

00:19

yes but rather there are different qualities of earnings What

00:23

if we told you that one hundred percent of whatever

00:25

dot coms earnings came from Adsit sold tto forty thousand

00:29

different buyers because its website was just that popular All

00:33

of the growth came intrinsically meaning that users just loved

00:37

using the site and nothing meaningful changed on their balance

00:40

sheet or wall street Fancy engineers doing creative clever things

00:44

with the selling of money Other than that the cash

00:47

account went up because dead profits and they kept him

00:50

okay Those air very high quality earnings Really sure about

00:54

that C we threw a curveball in there We do

00:57

that all the time All right Well what if we

00:58

told you that seventy percent of their ad sales came

01:01

from a subsidiary in china and were all collected in

01:05

our m b the chinese currency and that in this

01:08

quarter well that the chinese currency appreciated thirty eight percent

01:12

relative to the dollar Well essentially all of their big

01:16

growth The big growth that we thought was such high

01:18

quality earnings came because the chinese currency did well not

01:22

because their business did all that well so wait Had

01:26

the chinese currency just been flat the company wouldn't have

01:29

earned anything close to a dollar thirty to seventy percent

01:33

of the sales and almost forty percent of currency gain

01:37

there Well it means that the company happened to have

01:40

a lot of sails in a country with a fast

01:42

appreciating currency It wasn't necessarily a direct reflection that the

01:46

company was doing so well and had such high quality

01:49

earnings Yeah it's great that they were in a hot

01:51

market and highly appreciating currency but if the currency hadn't

01:54

gone up so much relative to the u s dollar

01:56

in which they report their earnings toe wall street while

01:59

the real urn things end of the company would have

02:01

been more like a dollar maybe less so that it

02:04

be low quality earnings What about high quality earnings Well

02:09

really simply you said you'd sell three hundred tractors this

02:13

quarter the street thought you'd sell three hundred ten You

02:16

actually sold three hundred twenty you said margins would be

02:19

twenty percent The street thought they'd be twenty two percent

02:22

and they actually were twenty five percent You said you

02:25

generate twenty million dollars in cash the street thought you

02:28

generate twenty two and you actually did generate twenty five

02:32

million dollars in cash High quality financial results Simple You

02:36

just did your core business Selling tractors well Quality earnings 00:02:41.233 --> [endTime] quality tractors

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