03. Why profit can fall while revenue grows

Revenue growth tells you that the top line increased. It does not tell you how much of each sale remains after buying goods and running the business. Hanbit Tools earns revenue of 200 in its first year, but the steps below it explain the economics. Amounts are KRW million.

Revenue is not the same as cash collected

Under IFRS 15, revenue recognition follows satisfaction of performance obligations through transfer of control, rather than simply the arrival of cash.¹ In our simplified completed-sale example, revenue is 200, cash collected is 150, and receivables are 50. A customer prepayment would raise a different question: has the company actually delivered what it owes?

For a real business, read recognition policies and contract terms before treating bookings, billings, and recognized revenue as interchangeable. A strong sales headline can coexist with payment delays or obligations still to be performed.

Walk down the income statement

Inventory purchases were 130, but only the goods costing 120 were sold. The remaining 10 stays in inventory. IAS 2 connects the expense recognition of sold inventory to the related revenue.² Subtracting all purchases as cost of goods sold would erase the unsold asset and distort profit.

More sales can produce less operating profit

Consider a separate next-year scenario: revenue rises to 240, goods sold cost 168, operating cash expenses rise to 38, and depreciation becomes 10. Gross profit is 72 and EBIT is 24. Revenue grew 20%, while EBIT fell about 42.9% from 42.

Gross margin fell from 40% to 30%. Possible explanations to investigate include supplier prices, discounting, or a shift toward lower-margin products. The arithmetic does not identify which explanation is true. Separate sales volume, price, product mix, and costs before assigning a cause. This scenario does not replace the first-year balance sheet used elsewhere in the series.

Look beneath the real company's total

Apple's fiscal 2025 Form 10-K reports total net sales of USD 416,161 million and Services net sales of USD 109,158 million, about 26.2% of the total.³ Use that breakdown to practice locating business composition, then investigate the different economics of each category. The proportion alone does not establish either category's value or future growth.

Apple reports under US GAAP; our teaching references to IFRS do not imply identical accounting requirements. Preserve the reporting framework and fiscal period in your notes.

Keep a short record

For one company, write revenue growth, gross margin, operating margin, and the largest change below revenue. Then ask what evidence would distinguish pricing strength from temporary cost relief. A profitable sale is only the next step: the following chapter asks when its cash arrives.

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Footnotes

1. IFRS Foundation, IFRS 15 Revenue from Contracts with Customers. Revenue recognition and transfer of control. ↩

2. IFRS Foundation, IAS 2 Inventories. Recognition of the carrying amount of sold inventory as expense. ↩

3. Apple, 2025 Form 10-K. Products and Services Performance, printed page 23; fiscal year ended September 27, 2025; USD millions. ↩