The Profit & Loss (or income Statement) is one of three reports or statements that a company or business produces which shows how the business has performed. The other two reports are Balance Sheet (Financial Position) and Cash Flow Statement.
The Profit & Loss reports on a particular prior period eg month, quarter, year, and shows the sales or revenue, less cost of the goods sold (if selling product), then takes away the operating expenses or overheads to show either a gain/profit, or loss.
Below that, there may be unusual other income or expenses (non-operating) that are then claimable, and added or taken away after that. For example, sale of assets or events that are not part of the regular operations of the company.
Revenue or sales are compared to prior years – ideally we want to see growth in sales.
The Cost of Sales will usually include raw material, labour and manufacturing costs to produce goods that are sold. If the business is a service business eg accounting, there are no products, just service.
Gross Profit is Revenue/Sales less Cost of sales and if costs can be reduced or kept stable while sales grow, the business is healthier and seen as an ideal management process.
Operating Expenses or overheads include selling and general administration costs – office expenses, stationary, office and sales staff wages.
Operating Income/profit/revenue will be the Gross Profit less the Operating Expenses, often also known as Earnings Before Interest, Depreciation and Amortisation (EBITDA).
Next Depreciation and Amortisation are listed and deducted, leaving EBIT.
Then Interest and Tax (company tax – Australia is 30%) are listed and deducted.
Net Profit or Net Income is the final amount left
For the investor
From the investor view point, it is important to gain an understanding of what the company sells, how that compares to similar companies, what costs are involved and whether unnecessary costs are being paid, what gross profit is achieved (often expressed as a percentage so it can easily be compared to similar companies for comparison) and what operating profit at EBITDA and EBIT levels.
Then comparisons with prior years by looking at what changes in sales, Gross Profit and Net Profit – growth or decline, helps the investor determine the efficiency and competency of the management.
Our slides SMSF & Shares Overview give a quick session to learn to easily understand Company Financial Statements, how to find healthy companies, what tools and Ratios to use, work on examples, and also includes how to get better investment outcomes.