The term income may have several meanings. In corporate finance it basically means profit or earnings that are equal to revenue less expenses. But in some cases income may also indicate company’s revenue but to be more exact in such cases income should be named as total income. As for individuals income is equal to salary plus all other earnings that they receive.
Those are main types of income:
Basically income represents either the revenues either some kind of a profit but in any case higher income and increase in income is a good sign for the company. Yet, not only the quantity of income is important but the quality too. One-off income doesn’t have that much of importance to company’s market value as continuing income does. Higher income of the company means lower valuation multiples which makes company’s stock a more attractive investment.
The only way to measure if company’s income is high enough, is to compare financial ratios of the company with ratios of similar companies in the same industry. Such financial ratios could be profit margin, EBITDA margin, ROE or other financial ratios that are based on income per employee or other parameter. If company’s income is lower than competitors’ but companies are the same size (in numbers of employees and capital) then must be some reasons behind that.
The stability of income is also important indicator and usually companies that receive more stable income are worth more because investments in stocks of such companies are less risky. The stability of the company’s income mostly depends on the sector. Some sectors tend to be cyclical and companies that work in such sectors are always fluctuating in income. Other sectors are more stable but it doesn’t mean that company’s income cannot change. There are many factors in the environment that may have affect to income of even the most stable companies. Such factors can be caused by economical environment, political environment, technological jump, new competitors etc.
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