Income Statement

What is an Income Statement?

An income statement is a financial statement that shows a company's revenues and expenses over a period of time. It also shows the company's net profit or loss over that period of time.

It shows how the revenues (money received from the sale of products and services before expenses are taken out, also known as the top line) are transformed into the net income (the result after all revenues and expenses have been accounted for, also known as net profit or the bottom line).

Components

• Revenue - the total amount of money received from the sale of products and services.
• Cost of Goods Sold (COGS) - the direct costs attributable to the production of the goods sold in a company.
• Gross Profit - the difference between revenue and COGS $\\=\text{Revenue}-\text{COGS}$.
• Operating Expenses - the expenses incurred during regular business operations.
• Operating Income (Earning Before Interest and Taxes - EBIT) - the difference between gross profit and operating expenses $\\=\text{Gross Profit}-\text{"Operating Expenses"}$
• Interest Expenses - the cost of borrowing money.
• Income Before Taxes - the difference between operating income and interest expenses $\\ =\text{Operating Income}-\text{Interest Expenses}$.
• Income Tax Expenses - the amount of tax payable as a result of the taxable profit.
• Net Income (Net Earnings) - the difference between income before taxes and income tax expenses $\\ =\text{Income Before Taxes}-\text{Income Tax Expenses}$.

Example

Analysis

• Time Series Analysis: Compare the income statement of a company over time.
• Cross Sectional Analysis: Compare the income statement of a company with other companies in the same industry.

Common Size

Common size analysis is a tool that allows you to compare financial statements by converting them to percentages. It is also known as vertical analysis.

Example

Data

Calculation

For Company A, we would have the following percentages:

• Net Revenue: $\frac{10,000,000}{10,000,000} = 1 = 100\%$
• COGS: $\frac{3,000,000}{10,000,000} = 0.3 = 30\%$
• Gross Profit: $\frac{7,000,000}{10,000,000} = 0.7 = 70\%$
• R&D Expenses: $\frac{2,000,000}{10,000,000} = 0.2 = 20\%$
• Advertising Expenses: $\frac{2,000,000}{10,000,000} = 0.2 = 20\%$
• General Expenses: $\frac{1,000,000}{10,000,000} = 0.1 = 10\%$
• Operating Income: $\frac{2,000,000}{10,000,000} = 0.2 = 20\%$
• Interest Expenses: $\frac{10,000}{10,000,000} = 0.001 = 0.1\%$
• Income Before Tax: $\frac{1,990,000}{10,000,000} = 0.199 = 19.9\%$
• Income Tax Expenses: $\frac{398,000}{10,000,000} = 0.0398 = 3.98\%$
• Net Income: $\frac{1,592,000}{10,000,000} = 0.1592 = 15.92\%$

Table

Interpretation

• Company A and C have the same gros profit percentage related to their sales.
• Coompany C's profit is lower than Company B's in absolute Euros but higher in percentage.
• Company C is relatively more profitable than Company B.
• Company A reports significantly higher profit as percentage than Company B.

Reasons

• Company A has higher advertising and R&D expenses. R&D leads to higher innovation and advertising leads to greater band awareness.
• Company B is selling its product at a lower price than Company A (lower gross profit)

Ratio

Gross Profit Margin (GPM)

Gross profit margin is a financial metric used to assess a company's financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS).

It indicates efficient cost management and pricing strategies -> more profitable, more desirable

Operating Profit Margin (OPM)

Operating profit margin is a profitability ratio that shows the percentage of profit a company produces from its operations, prior to subtracting taxes and interest charges.

It reflects efficiency and management's ability to control operating expenses

Net Profit Margin (NPM)

Net profit margin is the percentage of revenue left after all expenses have been deducted from sales. The measurement reveals the amount of profit that a business can extract from its total sales.

It explains the overall profitability of the organisation -> more profitable, more desirable