What Is The Income Statement?
A company’s income statement, also know as the profit & loss statement, documents its revenues and expenses during a given period. The top line of the income statement is revenue. The bottom line of the income statement is net income. To get from the top to the bottom line, the company’s expenses are subtracted.
Income Statement Basics
All publicly traded US companies are required to submit their income statement to the SEC. This makes finding this statement quite easy for investors who can find the income statement on the SEC’s EDGAR Database, SEC filings (10K, 10Q, etc.), or third party organizations, such as the Boyko Terminal. The income statement represents a specific period of time, such as a fiscal year or a fiscal quarter. This statement can be used by investors to assess a companies operating performance in a given period. Unlike the cash flow statement, the income statement accounts for non cash expenses such as amortization.
The Income Statement’s Structure
As stated before, the top line of the income statement is revenue, the bottom line is net income, in between is expenses and non-operating gains. Below is a simplified view of an income statement and an explanation of each component.
- Revenue – Income generated via a business’s primary operations
- Cost Of Goods Sold – Direct costs that come when selling products
– Depreciation
– Amortization
- Gross Profit – Revenue – COGS (more info)
- Operating Expenses – Expenses related to typical operations (excluding COGS)
– Selling, General, & Administrative (SG&A) Expenses
– Research & Development (R&D) Expenses
- Operating Income – The amount earned through typical operations, also known as EBIT
- Non-Operating Income – The Net amount earned/lost outside of typical operations
- Pretax Income – Total income before accounting for tax expenses
– Income Tax Expense
- Net Income – The net profits brought in by a company over a given period
Analyzing The Income Statement
As with any financial statement, the income statement is a very valuable tool for fundamental analysis. The income statement, in particular, allows investors to measure profitability, gauge fundamental trends, identify economic moats, and so much more. Profitability can be measured and compared to that of competitors via profit margins, such as the gross margin, operating margin, pre-tax margin, and the net margin. High margins, shown on an income statement, may indicate pricing power or cost advantages, two signs of an economic moat. One desirable trait on an income statement is consistency. Volatile margins may indicate instability which is troublesome to creditors and equity investors. Examining trends within a company’s income statement may also prove useful. For example, consistently falling revenues coupled with rapidly rising expenses may be troublesome.
Non-GAAP Income Statement Metrics
The income statement is reported under generally accepted accounting principles (GAAP). However, many investors prefer alternative metrics, without the strict GAAP guidelines. One popular, non-GAAP metric is earnings before interest, taxes, depreciation, and amortization (EBITDA). However, non-GAAP metrics tend to ignore certain key factors. Some companies may mislead investors by highlighting non-GAAP metrics to paint a false picture of profitability.
