Understanding the Profit and Loss Statement: A Beginner's Guide for Investors

Income statement is the most important financial document for assessing a company’s financial health. However, many people are still confused about what it really is and how to read it correctly.

What exactly is the (P&L)?

The income statement, also called in English as Profit and Loss Statement (P&L), is a financial report that shows a company’s performance over a specified period. It summarizes how much money the company received, how much it spent, and whether it made a profit or incurred a loss at the end.

The importance of this statement lies in that it tells us three main things:

• Is this company profitable?
• Where does the profit come from?
• Which expenses should be considered?

Basic Formula: Straightforward

The calculation formula for the income statement is very simple:

Total Revenue - Total Expenses = Profit (or Loss)

If revenue exceeds expenses = profit
If expenses exceed revenue = loss

Main Components of the Income Statement

Revenue (Revenue)

Sales and Service Revenue is the only source of income for the company, coming from selling products or services to customers.

Other Income refers to money received from sources outside the core business, such as interest from bank deposits or rental income.

Cost of Goods Sold and Expenses

Cost of Goods Sold includes raw materials, labor, and everything related to manufacturing products.

Selling Expenses include advertising, marketing, transportation, commissions.

Administrative Expenses include employee salaries, office rent, training costs.

How to Read the Income Statement Correctly

( Step 1: Check the Period
First, see which period this statement covers )monthly, quarterly, or yearly###, as it indicates the timeframe of the data.

Step 2: Profit or Loss?

Look at the final figure. If positive = company is profitable; if negative = company is at a loss.

Step 3: Analyze Revenue Sources

Observe where most of the revenue comes from, as it indicates how strong the company’s core business is.

( Step 4: Study Expenses
See where most expenses go, and whether expenses are managed efficiently.

Different Levels of Profit

Gross Profit )Gross Profit( = Revenue - Cost of Goods Sold
Indicates how much the company can set prices above costs.

Operating Profit / EBIT )Operating Profit/EBIT( = Gross Profit - Operating Expenses
Shows the efficiency of actual operations.

Net Profit )Net Profit### = Total Revenue - Total Expenses
The amount remaining after deducting all expenses and taxes.

Formats of the Income Statement

( Report Format )Report Form###
Lists from revenue down to net profit, showing totals for each category, making it easy to read and understand the overall picture.

( Account Format )Account Form
Displays items in a T-account style, with expenses on the left and income on the right, more formal and clear.

Why Investors Should Care About the Income Statement

Assess Financial Performance - It helps you see how well the company is making profits from its operations.

Forecast the Future - Based on profit trends over several years, you can predict how the company might grow.

Deep Financial Analysis - This data forms the basis for investment decisions, borrowing, and business planning.

Strategic Management - Knowing which expenses are high allows the company to improve and increase profits.

Important Points to Remember

Reading the income statement is a fundamental skill for all investors. However, investment decisions should not rely solely on the P&L. You should also consider other factors such as the nature of the business, management quality, long-term growth potential, and industry competition environment.

Combining information from the income statement with other financial documents will give a comprehensive view and help you make smarter investment decisions.