Income Statement

The Income Statement

The Income Statement explains how much money the company is making or losing.

Revenue

Revenue also known as sales is how much money the company has brought in during a quarter or a year. Larger companies sometimes break down revenues on the income statement according to business sector, geographic region or products versus services. You will need to understand how revenue is been recognized in the financial statements, companies can record revenues at different times depending on business they are in.

Cost of Sales

Otherwise known as Cost of Goods Sold, represents the expense involved in creating revenue such as labor costs, raw materials or whole price of goods. Large companies combine manufacturing with services sometimes break down this number into cost of goods sold and cost of services.

Gross Profit

It is not a number on Income Statement but can be derived by revenue minus cost of sales. Once you have gross profit, you can calculate gross margin which is gross profit as a percentage of revenue. A more differentiated product or services will have a higher gross margin than its competitors.

Selling, General, and Administrative Expenses (SG&A)

This is known as operating expenses which includes items such as marketing, administrative salaries and research & development. If you see a forecast in decrease in SG&A, the company may be reducing headcounts. To analyse efficiency of a firm, you can look at SG&A as a percentage of revenues, a lower percentage of operating expenses relative to sales mean a tighter and cost effectiveness. You need to compare the company with the nearest competitors.

Depreciation and Amortization

When a company buys an asset intended to last a long time, such as a new building or a piece of machinery, it charges a portion of the cost of that asset on its income statement over a series of years. It is always included in the cash flow statement, you can look there to see how much a company’s net income was affected by non-cash charges such as depreciation.

Nonrecurring Charges/Gains

This is the area where companies put all one time charges or gains that is not the norm such as cost of closing a factory or gain from selling a business. It is preferred not to have this section in the Income Statement.

Operating Income

This number is equal to revenue minus cost of sales and all operating expenses. It represents the profit the company made from its actual operations, as opposed to interest income and one-time gains. Companies often include nonrecurring expenses in figuring operating income, and you have to add back one-time charges. Operating income excludes one time items as well as income from non-operational sources such as investments, you can use it calculate operating margin which is  comparable across companies and industries.

Interest Income/ Expense

Sometimes Interest Income and Interest Expense are listed separately and sometimes they are combined into net interest income. In either case, this number represents interest the company has paid on bonds it has issued or received on bonds or cash that it owns. You can get some insight into the financial health of a firm by looking at its earnings before interest and taxes relative to its interest expense which is called an interest coverage ratio.

Net Income

This number represents company’s profit after all expenses have been paid and it is the number most companies highlight in quarterly earnings. Net income can be distorted by one-time charges and investment income.

Number of Shares (Basic and Diluted)

This figure is the number of shares used in calculating earnings per share, it represents the average number of shares outstanding during the reporting period. Basic shares include only actual shares of the stock. Diluted shares include securities that could potentially be converted into shares of stock such as stock options and convertible bonds. Given the amount of granting of stock options that occurred over past years, it is the diluted number that you will want to look at because you want to know the degree to which your stake in the firm could potentially be shrunk or diluted if all those option holders converted their options into shares.

Earnings per Share (Basic and Diluted)

This number represents net income divided by number of shares. You need to look at cash flow and many other factors when considering EPS. This number does not represent all of the corporate financial performance.

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