Gross sale or sales or revenue is basically the amount a company receives against the sale of its products. When this amount is adjusted for company discounts, it becomes net sales. It is reported at the top of the company’s P&L statement and is also referred as company top line. From fundamental analysis perspective, the net sales figure is an important measure of company's ongoing growth and financial health. It is the starting point for calculation of many other important parameters such as operating profit and net profit.
As the company grows and matures, due to competition and other market factors, it gets difficult for companies to earn higher profit margins. Thus the only way company continues to grow its profit is by increasing its revenues and market share.
In addition to providing data on actual company performance, net sales analysis helps in estimating the future performance of the company too. If sales of a company have been increasing at a steady rate for past few years, one can safely assume that the trend will continue in the next year too. For trends that have variations, as a stock market investor, you must find reasons for the variation before making an investment decision in the company (Analyse net sales trend of your favourite company here).
While studying the P&L statement, do check if the company reports gross sales and net sales as separate line items. There can be substantial difference between gross sales and net sales and not reporting them as separate line items in the P&L statement will prevent investors from assessing the quality of sales transactions. If there is a big difference between gross sales and net sales, the reason for them should be disclosed by the company.
Let’s have a look at the net sales trend of two companies from the auto ancillary sector: Exide Industries and Amara Raja Batterie.
As clear from the figure above, the sales performance of Exide has not been good for 2013-2014 period and so has been its stock price performance as compared to Amara Raja Battery.