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Turnover vs Profit

Updated on June 14, 2024
Article byMelvin Sewak
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Turnover and Profit

Profit is the company’s earnings resulting after charging all the expenses against the net sales. In contrast, turnover is the net sales made by a company resulting from the transactions done during the accounting year, which may include one or more revenue generation sources that depend on the company’s strategy and operating structure.

Turnover-vs-Profit

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Turnover is the revenue generated by a company as a result of business transactions carried out during the financial year. It may comprise one or more revenue streams depending on the operating structure and strategy of the company. Whereas profit is the net residual earnings (or net income) of a company after deducting all the expenses against the turnover. They both make the first and last line of an income statement, hence their names.

Turnover vs. Profit Infographics

Let’s see the top differences between Turnover vs. Profit along with infographics.

Turnover-vs-Profit-info

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Key Differences

Though both are constituents of the income statement, they have entirely different stories to portray.

  • A company’s turnover is more about the total sales (including credit sales) generated by the company. It may include a single revenue stream or revenue from multiple channels through varied products and services. Companies report their revenue split across different streams of revenue based on products, services, and geographies in their notes for the financial statements so that investors can look at the core source of revenue and analyze the contribution towards the turnover.
  • Also, it represents the demand for the product and services of the company’s product in the market. So high turnover may either be related to high demand (or volume) of the products and services sold in the market or the high pricing of products and services charged by the company to its customers.
  • The profit of a company provides information about the health of a company. It is calculated after charging all the expenses against the company’s turnover. As a result, it provides you with a lot of information for different natures of expenses like direct expenses (like direct material cost, direct labor cost, etc.), indirect expenses like opex, financial costs, or exceptional line items.
    So, profit tells whether the company is left with any residual earnings even after charging all sorts of expenses to turnover. It brings the point of the pricing of products and services. A company should price its products and services high enough to leave the residual earnings that are in line with the interest of the shareholders of the company.

Turnover vs. Profit Comparative Table

BasisTurnoverProfit
DefinitionIt refers to the net sales (or net sum of all the revenue streams) of a company generated through business transactions during the financial year.It refers to the net residual earning (or net profit) after charging all the expenses against the turnover of a company generated through business transactions during the financial year.
ContextThough sometimes the term turnover could be used for balance sheet items like inventory turnover or asset turn over. Still, when used in relation to the income statement, it only refers to the residual earnings of a company.Though sometimes the term profit could be used in several contexts to state the gross profitability or operating profitability of the company but standalone, it refers to the bottom line of the income statement.
TypesSince it makes the top-line of the income statement, there are no formal variations to it. Though some might say that gross sales could also be used as a proxy for a turnover, it would not be the accurate figure as sometimes discounts to sales make a huge difference to net sales, especially in the retail sector.Since it makes the bottom-line of the income statement, there are also no formal variations to it. Though some might argue that gross profit or operating profit are also types of profit when using the term profit alone, it simply refers to the net residual earnings of a company.
UsageIt mainly tells about the demand for the product and services of a company in the market.It tells about whether the company is able to sell its product and services at a price high enough to cover all the expenses charged against the turnover of a company.

Application

Investors analyze a company’s financial statement to gain insights into its performance during a financial year and also to know about the historical and peer performance trends. Of course, turnover and profit both are very important for the company as well as all the shareholders and debt holders of the company. But a high turnover does not mean high profit or vice versa. The expenses charged to the income statement play a major role in inflating or deflating a company’s profits. Sales are considered the purest line item not affected by accounting gimmicks, but with practices like channel stuffing (i.e., inflating sales and earnings by pushing products more than their capacity to sell in the market to retailers along its distribution channel) have tainted this holy grail as well.

Final Thought

Turnover and profit make the most important parameters to analyze the performance of a company in comparison to historical and peer performance. In addition, both provide a perspective on the business strategy of a company to survive amongst the existing competition in the market.

Though they are not the “be-all and end-all” of any financial analysis, they hold high importance in the analysis process as both can be inflated or deflated by exploiting the numerous accounting loopholes present in the existing accounting standards. So, one should be aware of the accounting policies followed by the company when analyzing its performance. That being said, it does sound lucrative to have high turnover and profits. However, they do not guarantee the company’s survival in the long run.

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