Learning Objectives

After completing this chapter, you will be able to:

• Understand what a business model is.
• Differentiate between revenue and profit.
• Learn how companies generate income.
• Understand the difference between industries and sectors.
• Recognize examples of ASX-listed companies across different sectors.
• Develop the ability to evaluate a business before investing.

Introduction

Before investing in any company, it is important to understand how the business operates. A company's share price may rise or fall over time, but its long-term success often depends on how effectively it generates revenue, controls costs, and earns profits.

In this chapter, you'll learn the basics of business models, revenue, profit, industries, and sectors. These concepts will help you better understand what a company does before deciding whether it may be suitable for your investment research.

What is a Business?

A business is an organization that provides products or services to customers in exchange for money.

Every successful business aims to:

• Solve a customer problem.
• Generate revenue.
• Control expenses.
• Earn profits.
• Grow over time.

Examples

• Woolworths sells groceries.
• CSL develops healthcare products.
• BHP mines and sells iron ore and copper.
• Commonwealth Bank provides banking services.

Every company has its own way of making money. This is known as its business model.

What is a Business Model?

A business model explains how a company earns money.

It answers questions like:

• What products or services does the company sell?
• Who are its customers?
• How does it generate income?
• What makes the business different from competitors?

Before investing, understanding the business model helps investors assess whether a company has the potential to grow over the long term.

Example 1 – Woolworths Group (WOW)

Business Model:

• Purchases products from suppliers.
• Sells groceries and household goods through supermarkets.
• Earns revenue from customer purchases.
• Generates profits after covering operating costs.

Example 2 – Commonwealth Bank (CBA)

Business Model:

• Accepts customer deposits.
• Lends money to individuals and businesses.
• Earns interest on loans.
• Generates additional income through banking services and fees.

Example 3 – BHP Group (BHP)

Business Model:

• Mines natural resources.
• Sells commodities such as iron ore and copper globally.
• Revenue depends on production levels and commodity prices.

Revenue vs Profit

Many new investors believe revenue and profit mean the same thing. They are different.

Revenue

Revenue is the total money a company earns before expenses are deducted.

Also known as:

• Sales
• Turnover
• Top Line

Example:

A company sells products worth $10 million.

Revenue = $10 million

Profit

Profit is the money left after all business expenses have been paid.

Expenses may include:

• Employee salaries
• Rent
• Marketing
• Manufacturing costs
• Taxes
• Interest

Example:

Revenue = $10 million

Expenses = $8 million

Profit = $2 million

Why Profit Matters More Than Revenue

High revenue does not always mean a company is financially strong.

Consider these examples:

Company A

• Revenue: $100 million
• Expenses: $98 million
• Profit: $2 million

Company B

• Revenue: $40 million
• Expenses: $25 million
• Profit: $15 million

Although Company A generates more revenue, Company B earns a much higher profit.

Many investors pay close attention to both revenue growth and profitability when evaluating companies.

Understanding Industries and Sectors

Companies are grouped into sectors based on the type of business they operate.

Within each sector are smaller groups called industries.

Think of it like this:

Sector → Industry → Company

Major ASX Sectors

Financials

Examples:

• Commonwealth Bank (CBA)
• Westpac (WBC)

Business Activity:

• Banking
• Insurance
• Financial services

Materials

Examples:

• BHP
• Rio Tinto (RIO)

Business Activity:

• Mining
• Metals
• Resources

Healthcare

Examples:

• CSL
• Cochlear (COH)

Business Activity:

• Pharmaceuticals
• Medical technology
• Healthcare services

Consumer Staples

Examples:

• Woolworths (WOW)
• Coles (COL)

Business Activity:

• Groceries
• Essential household products

Technology

Examples:

• Xero (XRO)
• WiseTech Global (WTC)

Business Activity:

• Software
• Cloud technology
• Digital solutions

Why Industries Matter

Different industries perform differently during various stages of the economy.

For example:

• Banks may benefit when lending activity increases.
• Mining companies may benefit when commodity prices rise.
• Healthcare companies often experience relatively steady demand.
• Technology companies may grow rapidly but can also experience higher volatility.

Understanding the industry helps investors better evaluate the risks and opportunities associated with a company.

Questions to Ask Before Investing

Before researching any company, ask yourself:

• What does the company sell?
• How does it make money?
• Who are its customers?
• Is demand for its products likely to continue?
• Which sector does it operate in?
• Does the business appear profitable?

These questions help build a strong foundation before analysing financial statements or company performance.

Key Takeaways

• Every company follows a business model to generate income.
• Revenue is the total income a business earns before expenses.
• Profit is what remains after all expenses are paid.
• High revenue does not always mean high profitability.
• Companies are grouped into sectors and industries.
• Understanding a company's business model is one of the first steps before investing.