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Revenue can stay flat or rise while earnings decline because revenue is sales recognized for the period, not the amount left after expenses. Higher costs to make or deliver products, a shift toward lower-margin sales, rising operating expenses, interest, or taxes can all reduce profit. To find the reason, follow the income statement from revenue through gross profit, operating income, and net income—and identify exactly which measure of “earnings” fell.
What revenue and earnings measure
Revenue is the amount a business recognizes from providing goods or services during a period. The timing depends on the company’s applicable accounting policy; for example, dsm-firmenich says revenue from goods is recognized when its performance obligation is satisfied in its 2024 annual report.
Earnings is less precise: it may refer to gross profit, operating income, net income, or earnings per share (EPS). Each measure includes a different set of costs. A company can therefore report stable revenue alongside falling operating income, or stable operating income alongside falling net income, for different reasons.
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How to trace the decline through an income statement
Compare the same fiscal periods and use the company’s reported figures. Then work down the statement in order:
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- Revenue: Confirm whether sales were flat or growing, and whether the comparison is year over year, quarter over quarter, or against guidance.
- Cost of sales or cost of revenue: Check whether the costs of producing goods or delivering services grew faster than revenue. Possible contributors include inputs, labor, freight, and production costs, but use the company’s explanation rather than assuming a cause.
- Gross profit and gross margin: Gross profit is revenue left after cost of sales. Gross margin is gross profit expressed relative to revenue. A lower gross profit or margin points to pressure before operating expenses are deducted. For its own gross-margin presentation, read Target’s annual report in context; the company defines gross margin using net sales less cost of sales.
- Operating expenses: Examine selling and marketing, research and development (R&D), general and administrative costs, and depreciation or amortization. These expenses can outpace gross profit; Veritone’s 2025 Form 10-K, for example, presents several of these categories separately.
- Operating income: This shows the result after operating costs. It can fall even when revenue holds up if gross margins weaken or operating expenses increase.
- Interest, other items, and taxes: Review these lines to understand why net income differs from operating income. Interest expense, foreign-exchange effects, other gains or losses, and tax expense or benefits may affect net earnings without changing the operating result. Veritone reports interest, other expense, tax benefit, and net income separately in its 2025 filing.
- EPS, if relevant: Compare net income and the share count as well as EPS. A change in EPS does not, by itself, show that total net income changed by the same proportion.
Why revenue and margins can move in different directions
Direct costs and sales mix
Stable sales do not guarantee stable gross profit. A business may sell more lower-margin products, discount more, or pay more to make or deliver each unit. Any of these could reduce the share of revenue remaining after direct costs; which explanation applies depends on the company’s reported results.
A reported example shows why period and business context matter. dsm-firmenich’s gross profit as a percentage of net sales was 33% in 2024, versus 25% in 2023. The company attributed the improvement to better business margins, particularly in ANH, and the full-year inclusion of Firmenich results, according to its 2024 annual report. This is an example of a margin increasing, not evidence that every company’s margins move for the same reasons.
Operating expenses
Payroll, marketing, R&D, administration, and depreciation can rise as a company invests, restructures, or expands. These costs need not move in step with revenue in a particular period. Microsoft’s annual report describes sales and marketing expenses that include payroll, employee benefits, stock-based compensation, advertising, promotions, trade shows, and seminars. Veritone’s filing separately lists sales and marketing, R&D, general and administrative, and depreciation and amortization expenses.
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Fixed costs and operating leverage
Fixed costs generally remain unchanged across a range of activity, while variable costs move with activity. That distinction affects how sensitive operating income is to changes in revenue. With substantial fixed costs, a decline in volume or utilization may reduce sales while many expenses persist; operating income can then fall sharply. The reverse can also happen as activity rises. The effect depends on the company’s demand, capacity, and ability to adjust costs, as described in Mercer Capital’s discussion of operating leverage.
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Financing, other items, and taxes
Net income includes items below operating income. Higher interest costs, foreign-exchange changes, other expenses, or a different tax expense or benefit can weaken the bottom line even when operating performance is steadier. Microsoft describes foreign-exchange sensitivity affecting revenue and earnings; a company’s own filings are needed to determine whether that or another below-operating item explains a particular decline.
What reported figures can—and cannot—tell you
Seiko Epson Corporation’s statements for the fiscal years ended March 31, 2025 and March 31, 2026 provide a concrete case. Revenue increased from ¥1,362,944 million to ¥1,413,251 million, while earnings attributable to owners of the parent fell from ¥55,177 million to ¥18,201 million. In the same statements, profit from operating activities declined from ¥75,108 million to ¥49,558 million, and finance costs rose from ¥2,900 million to ¥4,373 million. These are reported figures in millions of yen; the figures alone do not establish the company-specific causes. See Epson’s results materials for the company’s statements and explanations.
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Veritone’s year ended December 31, 2025 illustrates a different situation: its 2025 Form 10-K reports $100.0 million in revenue, total operating expenses equal to 188.1% of revenue, an operating loss equal to 88.1%, interest expense equal to 11.1%, and a net loss equal to 121.2%. These are loss-making results, not an example of a profitable company whose earnings fell while revenue held up. They do show why expense and below-the-line figures need to be read alongside revenue.
Make comparisons that mean the same thing
Before drawing a conclusion, check that the figures use comparable periods, currencies, and definitions:
Quick Recap
- Name the earnings measure: Distinguish gross profit, operating income, net income, and EPS rather than using “earnings” as if they were interchangeable.
- Match the time basis: Compare the same fiscal quarter or year, and note whether the reference is a prior period or management guidance.
- Use consistent reporting bases: Separate reported results from management-adjusted measures. Target identifies certain adjusted measures as non-GAAP in its annual report; such measures may exclude selected items and should not be treated as identical to reported results.
- Read explanations alongside figures: A change in margin or expense identifies where performance shifted, but does not by itself prove the cause. Use the company’s discussion of its own costs, mix, and other items.
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