The success of your investments depends on how well you have read the finances of a company before investing. These reports help analysts forecast the growth of the company.
One such performance indicator is the Profit & Loss Statement or a P&L statement. These are also called Income Statements, Statements of Operations. These statements are evidence of how well or worse your company is doing in the current market. It is created at the end of the fiscal year. However, some companies also issue it quarterly for their shareholders and customers. P&L also share information of earnings per share for the benefit of shareholders of the company.
An income statement typically comprises of
- Revenue of the company for the given period
- The expenses company incurred during that period
- The tax and descriptions
- The earnings per share
Let us dive right in to understand how you can read a P & L Statement:
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Understanding the Header
Before we start understanding an income statement, let us look at the headers first. This header typically consists of:
- Time: It signifies the period for which year it is. It also tells us whether the statement is quarterly or yearly.
- Scale for the Money: A header gives you information about the scale of money used for the calculations. Typically, it depends on the currency of the countries. In India, many companies use crores, whereas some MNCs use Millions.
- The hidden rule: It is an understated rule that the present or current year should always be on the left side and the previous year on the right side.
Understanding the Top Line of the Company
The first set of numbers that a company publishes in its profit & loss statement is the revenue. It tells you about the money generated through sales or other sources in a specific time frame for a company. This section consists of all the inline items of the companies which contribute towards the generation of money.
Here are some of the most used particulars of the Revenue section:
- Sale of Goods – It tells us the income a company generated by selling the goods in the same time frame
- Sales of Services – It indicates the money a company made by offering services to its clients or customers
- Another operative Revenue– It indicates all the incidental activities that generate money for a company; for example, machines sold, or any non-core services provided
- Other Income – It indicates all the non-core or non-principal activities that generate income money of the company; for instance: Dividend received, or Interest paid by the bank etc.
- Total Revenue – The sum of all the income generated from various sources in a fiscal year is known as Total Revenue.
Understanding the Expense Details
This section of an income statement states the expenses company incurs to generate the revenues. Expense is a sum of all the money spent for delivering or selling their goods & services.
Here are some of the usual company expenses:
- Cost of Materials Consumed – It indicates the money spent to buy raw materials for the fabrication or manufacturing of goods
- Cost of Storage, Inventories & WIP – The cost incurred by a company for storing the raw material, maintaining the inventories, and storing finished goods in the warehouse and the expenditure sustained during Work-in-Progress.
- Employee Benefits Expense– These expenses consist of salaries and wages of the employees. It also includes Some staff welfare expenses and contributions towards PF (Provident Fund).
- Depreciation and Amortization Cost– Everything changes, and so does the value of the machinery or land the company owns. The cost incurred by the company due to the depreciating value of their assets is known as depreciation cost.
- Other Expenses – All the non-core expenses incurred to the companies comes under other expenses; For instance, the cost of insuring goods, marketing, and advertising expense for selling the goods, administrative costs etc.
- Total Expense – The sum of all the expenses incurred by the company is known as a total expense.
- Understanding Operating Profit– The difference between the total revenue of the company and the total expense is known as Operating Profit.
Mathematically, Total Revenue – Total Expense = Operating Profit
The operating profit is also called profit before tax. After deducting all the tax liabilities and exceptional items, a company gets the final or Net Profit.
Understanding Earnings Per Share
Commonly known as EPS, this is the last line of a P&L Statement. EPS indicates the how much company is earning per face value of the ordinary share. It is a ratio of the Net profit of a company and the number of outstanding shares.
Mathematically, EPS = Net profit of company/ Number Outstanding share
Understanding a Profit & Loss statement is just the beginning. Remember, every company has a different P&L; for example, a hospital may not have a cost of goods sold in its income statement, so it is crucial to understand it thoroughly. Next time you invest in any company, make sure you read the Profit & Loss Statement before investing.