What is top line?
This appears at the top of the income statement and refers to the gross sales or total revenue of the company. In other words, it refers to the company’s total earnings without taking into consideration the operating expenses, depreciation, taxes, etc. A top-line growth indicates the rise in demand for a company’s products or services.
What is bottom line?
As the name suggests, this appears at the bottom of the income statement and refers to the net income, also known as net earnings or profit, that a company generates. This means that if one subtracts all the expenses from the gross revenue, one will get the net income. The company can improve its bottom line by cutting down operating costs or increasing its revenue. A rise in bottom line means that the company is meeting the demand for its products efficiently.
Illustration of top and bottom lines
Investors need to understand that a rise in top line doesn’t necessarily mean that the company is profitable or is performing efficiently. For clarity, let’s consider an example.
If a company makes total sales of Rs.50 crore in a given year, while its operating costs, taxes and interest add up to Rs.45 crore, it would have made a profit of Rs.5 crore. Here the top line is Rs.50 crore and bottom line is Rs.5 crore.
In the next year, suppose its total sales revenue shoots up to Rs.65 crore, but so do its operating and administrative expenses, rising to `61 crore. Its net profit will fall to Rs.4 crore. Here, even though the top line has surged by 30%, its net profit or bottom line has fallen.