A share price bounces around all day on hope, fear, and headlines. But over the long run, a company's value is anchored to something far more boring and far more real: whether the business actually makes money. The numbers that describe how a business performs are called the fundamentals, and you do not need to be an accountant to read the important ones. Let us build them up in the order they naturally happen inside a company, using a small bakery chain as our example.
Revenue: money coming in the door
Revenue is the total amount of money a company brings in from selling its products or services, before any costs are taken out. It is sometimes called the top line, because it sits at the very top of the income statement. If our bakery sells 2 million dollars of bread and cakes in a year, its revenue is 2 million dollars. Simple as that. Revenue answers the first question about any business: are people actually buying what it sells, and is that amount growing over time?
Earnings: money left after the bills
Earnings, also called net income or profit, is what remains after every cost is subtracted from revenue: ingredients, rent, wages, equipment, taxes, everything. It sits at the bottom of the income statement, so it is often called the bottom line. If our bakery earns 2 million in revenue but spends 1.8 million running everything, its earnings are 200,000 dollars. That leftover is the money the business truly made.
Earnings is the number the market obsesses over, because it is the closest thing to the truth about whether a company is a good business. Revenue shows demand. Earnings show whether that demand turns into actual profit.
Earnings per share: profit sliced per owner
Total earnings are useful, but as an owner you care about your slice. Earnings per share, or EPS, takes the company's earnings and divides them by the number of shares outstanding. If the bakery earned 200,000 dollars and has 100,000 shares, its EPS is two dollars. That means each share earned two dollars of profit for its owner over the year.
EPS is powerful because it lets you compare a company to itself over time and against others on a per-share basis. Rising EPS year after year is one of the cleanest signs that a business is growing its profit in a way that actually benefits shareholders.
Margins: how much of each dollar sticks
A margin is simply a profit expressed as a percentage of revenue. It answers the question: out of every dollar that comes in, how much does the company keep? If the bakery keeps 200,000 out of 2 million in revenue, its profit margin is ten percent, or ten cents of profit for every dollar of sales.
Margins are one of the most revealing fundamentals, because they show how efficient and how strong a business is. A company with fat margins keeps a lot of every sale, which usually means it has pricing power or runs a tight ship. A company with thin margins keeps very little, so even a small rise in costs can wipe out its profit. Comparing two companies' margins often tells you more than comparing their revenue.
Growth: the direction of travel
A single year of numbers is a photograph. What you really want is the film, which means watching how these figures change over time. Is revenue growing each year, or stalling? Is EPS climbing steadily, or bouncing around? Is the margin holding up as the company gets bigger, or shrinking? A business with rising revenue, rising earnings, and steady or improving margins is showing the pattern that healthy, growing companies tend to show.
How the fundamentals fit together
Read in order, the fundamentals tell a clean story. Revenue shows whether people are buying. Earnings show whether those sales turn into real profit. EPS translates that profit into your per-share slice. Margins reveal how efficiently the whole thing runs. And watching all of them over several years shows whether the business is getting stronger or weaker. Master these five ideas and you can look past a stock's daily mood swings to the actual company underneath.