How to Read and Interpret Income Statement

Income Statement tell investor how good the company is at making money  

Income statement also known as a Profit and Loss statement (P&L) is one of the three popular financial statements that report a company revenue, income and expenses quarterly.

Income statement typically arranged as follows and is read from top line to bottom line, the top line lists the Sales or Revenue and the bottom line of net income obtained by deducts cost and expenses from the revenue until the remaining amount left over as net income. Item in pink color means it is a subtotal or total.

Income Statement

Sales or Revenue (or Turnover) Wall Street jargon of "top line" for revenue.

(-) Discounts and Defective Returns

(=) Net Sales

(-) Cost of Goods Sold

(=) Gross Profit

(-) General Operating Expenses (SG&A, R&D and engineering)

(-) Provision for doubtful accounts, warranty cost, etc…

(=) Operating Income/Loss

(+)(-)Total non-operating Income And Expenses Net

(+) Interest Income

(=) EBITDA (Earning Before Interest, Tax, Depreciation and Amortization)

(-) Depreciation expense

(=) EBITA (Earning Before Interest, Tax, and Amortization)

(-) Amortization of goodwill

(=) EBIT (Earnings Before Interest and Taxes, also known as Operating Income/Profit)

(-) Interest Expenses, net

(=) Income/Earning Before Tax (Pretax Profit)

(-) Income Tax Expense (or Provision for income Taxes)

(-) Nonrecurring Events

(=) Net Income (or Net Profit or Net Earnings) Wall Street jargon of "bottom-line" for profit.

(-) Dividends

(=) Retained Earnings

Source: www.1st-Stock-Investment.com

Investor look at income statement because it shows how much money a company brought in (as revenues), how much it spend (as expenses) and the difference between the two is their profit or loss for a given period. It is important that investors be able to read and understand income statement in order to let them evaluate how good the company is at making money and company's financial condition before make a decision on stock investment or stock pick.

Income statement measure the profitability of a company, refer to financial ratio analysis for details. A company with little or no income  has little or no money to pay it's investors in the form of dividends. A company recorded losses for a consequences period could end up in bankruptcy. Some new companies are not expected to be profitable for a few years but over the long run, no company can survive without profit.

If you compare the net income between the two years will tell you the net income growth year on year. One important thing that income statement doesn't show is how the company is paying for it growth, you need to look at the cash flow statement to find out whether they are funding their growth from it operating, financing or investment activities.

Income Statement	Example of DELL Income Statement from Annual Report (10-K) Year 1998, 1999
	Income Statement	type	DELL 10-K 1998	DELL 10-K 1999
	Net Sales	key-in	$12,327	$18,243
	-Cost of Goods Sold	key-in	$9,605	$14,137
	=Gross Profit	formula	$2,722	$4,106
	-General Operating Expenses(SG&A, R&D and engineering)	key-in	$1,406	$2,060
	-Depreciation and amortization	key-in	$0	$0
	-Provision for doubtful accounts	key-in	$0	$0
	=Operating Income/Loss	formula	$1,316	$2,046
	(+)(-)Total Other Income And Expenses Net	key-in	$52	$38
	=EBIT	formula	$1,368	$2,084
	-Interest Expenses	key-in	$0	$0
	+Interest Income	key-in	$0	$0
	=Income Before Tax	formula	$1,368	$2,084
	-Income Tax Expense / Provision for income taxes	key-in	$424	$624
	(+)(-)Equity Earnings Or Loss Unconsolidated Subsidiary	key-in	$0	$0
	-Minority Interest	key-in	$0	$0
	-Nonrecurring Events	key-in	$0	$0
	=Net Income	formula	$944	$1,460
	-Dividend	key-in	$0	$0
	- preference Stock Dividend	key-in	$0	$0
	=Retained Earnings	formula	$944	$1,460
	Source: www.1st-Stock-Investment.com

 

Operating Income/Loss (= Gross profit - Operating Expenses)
[Operating Expenses = General Operating Expenses and R&D expenses]
General Operating Expenses are expenses require to running the day-to-day operation. such as research and development, rental, salaries, sales and marketing expenses costs.

EBITDA (Earning Before Interest, Tax, Depreciation and Amortization)

Earning Before Interest, Tax, Depreciation and Amortization EBITA; Depreciation is the amount of value an equipment or tangible assets loss in value over its useful life use by accountants to allocate the assets cost across the assets useful life
Straight-line depreciation schedule, Company deduct asset value by fix amount each year on financial statements until the assets has been fully depreciated.

Accelerated Depreciation Methods:

Two common methods of accelerated depreciation are Double Declining Balance and Sum-of-the-Years'-Digits. Accelerated depreciation methods put more weight on the current years deduction compare to the straight-line method.

EBIT also known as Operating Profit  

[EBIT = Operating Income +(-) Total other Income or loss +(-) Extraordinary Income or loss ]
Earning Before Interest and Tax EBIT; Other Income refer to rental, investment/currency gain etc... where all those income coming from non operating activities or not related to the company typical operations.

Extraordinary Income (Loss) occurs when money is gained (lost) due to unusual one time event such as damages from natural disaster or layoff in recession.

Net Income (=EBIT - Interest Expense - Income Taxes)

Interest Expense refers to the money a company use to fulfill it short term obligation such as interest payment. Income Taxes are federal and state taxes a company paid to federal government or state government. Normally company defer its to the later years.

Dividend

Dividends are amount of money a company decided to distribute to its common stockholders from the current year earning. Company may retain it earning to reinvest into new business for future growth instead of distribute it to the shareholder. No all companies have preferred shareholder but preferred shareholder have priority to received dividend over common shareholders.

Retained Earning (= Net Earnings - Dividends)

Retained Earning is the percentage of net earnings retain by company not paid out as dividend to be reinvested in core or new business or pay off debt.