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Investing Basics
Understand a little. Practice once. Write your own plan. Each lesson explains an idea with an example, then asks you to answer a question and write a short reason before reading the explanation. Gather your thoughts as you learn, then follow the prompts to write your own learning or investment plan.
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06 · Results, valuation, and expectations
What you’ll learn
Learn what else to check when a company reports growth.
Revenue is money a company earns from selling products or services. Net income also accounts for costs, expenses, and other items, so selling more does not always mean earning more profit. Compare matching periods, currencies, and accounting definitions.
Valuation asks how the market price relates to a company’s earnings and other business measures. A common measure, P/E, divides share price by earnings per share. A low ratio is not automatically a bargain; it may reflect concerns about future growth. It is not a useful direct comparison for a loss-making company.
See it in an example
Imagine revenue rising from 100 to 120 while costs and expenses rise faster, reducing profit. “Revenue grew 20%” is not enough to assess the business or conclude that its share price will rise. Look at profit, cash generated, and what investors had expected.
Market capitalization
- Plain meaning
- Market capitalization is the market value of all a company’s outstanding shares: share price multiplied by shares outstanding. It is the market’s price for the equity, not cash in the company’s bank account.
- See it in an example
- Company A has 100 million shares priced at 10, giving a market cap of 1 billion. B has 1 million shares priced at 100, giving 100 million. A’s lower share price still produces the larger market cap.
- When would I use this?
- Market cap helps compare company size. Read it alongside revenue, profit, and debt; deciding whether a price is reasonable requires more information.
- Common misconception
- A low share price does not by itself mean a cheap company. Companies have different share counts, so one share’s price is not enough for comparison.
Revenue
- Plain meaning
- Revenue is sales of goods or services recognized under accounting rules during a reporting period. It helps describe business scale, before subtracting the costs of running that business.
- See it in an example
- A shop recognizes 100,000 of monthly sales but also pays for inventory, wages, and rent. The sales figure describes business activity; it does not mean the owner earned 100,000 in profit.
- When would I use this?
- For revenue growth, check reporting periods, currencies, and business changes. Comparing the same quarter across years can be more interpretable than arbitrarily comparing two quarters.
- Common misconception
- Revenue recognition and cash collection can happen at different times. Read revenue, profit, and cash flow separately.
Net income
- Plain meaning
- Net income is the accounting result after revenue, costs, expenses, taxes, and other relevant items. A positive number generally means profit and a negative number loss, but it is not the change in bank cash.
- See it in an example
- In a simplified example, revenue is 1 million and costs, expenses, and taxes total 900,000, with no other gains or losses. Net income is 100,000. Any one-time gain from selling an asset would also need separate attention.
- When would I use this?
- Compare revenue and profit changes in a financial report, then examine the reasons and any one-time items.
- Common misconception
- One profitable quarter does not prove future profitability. Profit growth can reflect a one-time gain rather than improved core operations.
P/E ratio
- Plain meaning
- The price-to-earnings ratio compares share price with earnings per share, the profit attributed to each share. Dividing price by earnings per share gives P/E. Past earnings and forecast earnings produce different measures.
- See it in an example
- If a share costs 20 and the annual earnings per share used are 2, P/E is 10. With the same price but earnings per share of 1, P/E becomes 20.
- When would I use this?
- Before comparing P/E, check the earnings basis, industry, and earnings stability. Record those differences rather than comparing one number alone.
- Common misconception
- A low P/E is not automatically a bargain; it may reflect concerns about falling earnings. P/E is often unsuitable for direct comparison when earnings are negative.
Dividend
- Plain meaning
- A dividend is a distribution by a company to shareholders, often in cash but sometimes in other forms. Its amount and timing depend on company decisions and announcements; it is not fixed interest.
- See it in an example
- A declared cash dividend of 0.50 per share gives 50 for 100 eligible shares before taxes or fees. Share price changes still matter; that payment alone is not the investment’s net return.
- When would I use this?
- Read the eligibility, dates, and amount in the announcement. For longer-term performance, consider dividends together with price changes.
- Common misconception
- A history of dividends does not guarantee future payments. A company may reduce or stop them, and its share price can fall.
Use what you just learned to answer a question
Choose the answer you think fits and write a short reason in your own words. Then submit to see the answer and explanation and check your understanding.
Try this for yourself
Next time you read an earnings story, identify revenue, profit, and the comparison period. Record the disclosed numbers separately from your own guesses about the share price.
07 · Write rules you can follow
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Learning and research support; no personal trade instructions or guaranteed returns. · Version 2026-09-13.1