How to Analyze an Income Statement
The income statement, also known as the profit and loss (P&L) statement, is one of the most important financial statements. It shows the company's financial performance over a specific accounting period.
Key Components of an Income Statement
- Revenue (Sales): The total amount of money brought in by the company's operations. This is the "top line".
- Cost of Goods Sold (COGS): The direct costs attributable to the production of the goods sold in a company.
- Gross Profit: Revenue minus COGS. It represents the profit a company makes after deducting the costs associated with making and selling its products.
- Operating Expenses: Expenses incurred through normal business operations (e.g., rent, equipment, inventory costs, marketing, payroll).
- Operating Income: Gross Profit minus Operating Expenses. Also known as EBIT (Earnings Before Interest and Taxes).
- Net Income: The "bottom line". It is the Operating Income minus financing costs (interest) and taxes.
What to Look For
When analyzing an income statement, look for:
- Revenue Growth: Is the company's revenue increasing year over year?
- Profit Margins: Are the gross and net profit margins stable or improving? High margins can indicate a competitive advantage or "moat".
- Consistency: Does the company have a history of consistent earnings?
The Formula
Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)