Sales vs. revenue

Q: If a company has a lot of sales, might it still be a bad investment?

H.A., Glendale, California

A: It’s very possible. Sales (also known as revenue) are what a company takes in for its products and services. But if the company spends more than it takes in, it ends up with losses instead of profits. This all shows up on a company’s income statement (sometimes referred to as a “statement of earnings” or “statement of operations,” among other things). It starts with sales at the top, and then subtracts costs such as raw materials, payroll, marketing and taxes, eventually arriving at net income, which can be positive (profits) or negative (losses). Ideally, a company will have growing revenue and growing profits. But even good companies can have a year or two in the red — perhaps because they’re spending heavily on advertising or on growth, or because they’re facing a temporary setback. And younger, smaller companies may run many losses in their early years. So unprofitability isn’t necessarily a dealbreaker, but it’s best to focus your dollars on companies that are reliably profitable. With any possible investment, study its financial reports: Check whether it’s gaining or losing market share, how strong its competitive advantages are, and whether its future seems promising.