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How to read an Income Statement
One of the three major financial statements used to reflect a company's financial performance during a certain accounting period is the income statement. The income statement shows a company’s revenue and expenses over a period of time. It is also called a Profit and Loss statement or P&L.
The most common time periods of reporting are:
1. 1 quarter (90 days)
2. 1 year (365 days)
3. TTM (“trailing twelve months”)
4. YTD (year to date)
Companies usually show the income statement in the quarterly earnings press release but not always. You can find them by looking at:
1. 10-Q (quarterly report)
2. 10-K (annual report)
The income statement focuses on four key items—revenue, expenses, gains, and losses. It makes no distinction between cash and non-cash revenues (cash sales vs. credit sales) or cash vs. non-cash payments/disbursements (purchases in cash versus purchases on credit).
The income statement flows in a step-down manner. The top number is revenue (sales) and costs are subtracted as you go down.
Let’s take them one by one:
1) Revenue – this is the amount received or to be received from the sales of products/services during this period. Sales revenue is net, meaning it includes discounts, returns and any other deductions from the sales price.
2) COGS (cost of goods sold) – this figure shows all of the costs & expenses related to producing the product or that service. If you sell smartphones these would be the variable costs of: chips, plastic, labor costs, etc…to manufacture smartphones.
3) Gross profit – this is Revenue – COGS. It is also called “gross income”.
4) Operating expenses (OPEX) – a category that includes all costs to run a company’s day-to-day operations. These categories may include: Research and Development (R&D), Sales, Marketing, Selling, General and Administrative (SG&A), Overhead (rent, utilities, travel, salary, bonus, stock-based compensation).
5) Operating income – Gross Profit – OPEX. This shows how much profit a company earned from its ongoing operations. It is also called “EBIT”, which stands for “Earnings Before Interest and Taxes”.
6) Interest Expense – The amount of interest paid during this period. This can also include other types of financing charges like loan origination fees.
7) Pre-tax income – OPEX-Interest Expense. Also called “EBT” or “Earnings before Tax”
8) Income Tax Expense – Taxes paid to federal and local governments.
9) Net Income – Also called earning or profits. If the number is positive the business is profitable. If the number is negative, the business is unprofitable.
To calculate “Earnings per share” or EPS we must divide the net income to the amount of shares outstanding a company has. For example: If a company makes 10 million and it has 1 million shares outstanding, each share is entitled to $10.
An income statement may provide a lot of information about a company's operations. It comprises a business's operations, managerial efficiency, potential profit-eroding leaky areas, and if the organization is operating in line with industry peers.
Trade with care.
If you like our content, please feel free to support our page with a like, comment & subscribe for future educational ideas and trading setups.
The most common time periods of reporting are:
1. 1 quarter (90 days)
2. 1 year (365 days)
3. TTM (“trailing twelve months”)
4. YTD (year to date)
Companies usually show the income statement in the quarterly earnings press release but not always. You can find them by looking at:
1. 10-Q (quarterly report)
2. 10-K (annual report)
The income statement focuses on four key items—revenue, expenses, gains, and losses. It makes no distinction between cash and non-cash revenues (cash sales vs. credit sales) or cash vs. non-cash payments/disbursements (purchases in cash versus purchases on credit).
The income statement flows in a step-down manner. The top number is revenue (sales) and costs are subtracted as you go down.
Let’s take them one by one:
1) Revenue – this is the amount received or to be received from the sales of products/services during this period. Sales revenue is net, meaning it includes discounts, returns and any other deductions from the sales price.
2) COGS (cost of goods sold) – this figure shows all of the costs & expenses related to producing the product or that service. If you sell smartphones these would be the variable costs of: chips, plastic, labor costs, etc…to manufacture smartphones.
3) Gross profit – this is Revenue – COGS. It is also called “gross income”.
4) Operating expenses (OPEX) – a category that includes all costs to run a company’s day-to-day operations. These categories may include: Research and Development (R&D), Sales, Marketing, Selling, General and Administrative (SG&A), Overhead (rent, utilities, travel, salary, bonus, stock-based compensation).
5) Operating income – Gross Profit – OPEX. This shows how much profit a company earned from its ongoing operations. It is also called “EBIT”, which stands for “Earnings Before Interest and Taxes”.
6) Interest Expense – The amount of interest paid during this period. This can also include other types of financing charges like loan origination fees.
7) Pre-tax income – OPEX-Interest Expense. Also called “EBT” or “Earnings before Tax”
8) Income Tax Expense – Taxes paid to federal and local governments.
9) Net Income – Also called earning or profits. If the number is positive the business is profitable. If the number is negative, the business is unprofitable.
To calculate “Earnings per share” or EPS we must divide the net income to the amount of shares outstanding a company has. For example: If a company makes 10 million and it has 1 million shares outstanding, each share is entitled to $10.
An income statement may provide a lot of information about a company's operations. It comprises a business's operations, managerial efficiency, potential profit-eroding leaky areas, and if the organization is operating in line with industry peers.
Trade with care.
If you like our content, please feel free to support our page with a like, comment & subscribe for future educational ideas and trading setups.
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