Income Statement
The income statement shows a company's revenue, costs and profit over a period. Learn each line from revenue to EPS, a worked example and what traders watch.
The income statement, also called the profit and loss statement (P&L), shows how much a company earned and spent over a period, such as a quarter or a year. It starts with revenue at the top and subtracts costs step by step until it reaches net income, the "bottom line". Earnings per share, the most watched number in earnings season, comes from the income statement. Learning to read each line helps traders see not just whether a company made money, but how and whether that is sustainable.
The structure#
| Line | Meaning |
|---|---|
| Revenue (sales) | Money earned from selling goods and services |
| Cost of goods sold (COGS) | Direct costs of producing what was sold |
| Gross profit | Revenue minus COGS |
| Operating expenses | Selling, general and administrative (SG&A), research and development (R&D) |
| Operating income (EBIT) | Gross profit minus operating expenses |
| Interest expense and other items | Financing costs, investment income, one off gains and losses |
| Pre tax income | Operating income after interest and other items |
| Income tax | Taxes on profit |
| Net income | Profit after all expenses and taxes |
| Earnings per share (EPS) | Net income divided by shares outstanding |
A worked example#
Key lines in detail#
- Revenue: growth rate and quality matter most. See Revenue and Gross Profit.
- Gross profit and gross margin: reflect pricing power and production efficiency.
- Operating expenses: R&D and marketing can be investments in future growth.
- Operating income (EBIT): profit from the core business. See Operating Income, EBIT and EBITDA.
- Net income and EPS: what shareholders earn. See Net Income and EPS.
Non cash and one off items#
Income statements include non cash charges such as depreciation, amortisation and stock based compensation, and one off items such as restructuring costs, impairments or gains on asset sales. Companies often present adjusted figures that exclude these. Traders should understand what is excluded and whether "one off" charges recur every year. See Earnings Quality and Cash Conversion.
What traders watch#
| Metric | Why |
|---|---|
| Revenue vs consensus | Growth surprises move stocks. See Analyst Estimates, Surprises and Whisper Numbers |
| EPS vs consensus | The headline beat or miss |
| Margins vs last year | Signs of pricing power or cost pressure |
| Operating leverage | Profit growing faster than revenue. See Operating and Financial Leverage |
| Segment results | Which parts of the business drive growth |
| Share count | Dilution or buybacks. See Buybacks |
Year over year and sequential comparisons#
Many businesses are seasonal, so traders compare a quarter with the same quarter last year (year over year) rather than the previous quarter (sequential). Retailers, for example, earn much of their profit in the holiday quarter.
Limits of the income statement#
- Accrual accounting recognises revenue when earned, not when cash is received, so profit can differ from cash. See Cash Flow Statement.
- Accounting choices affect reported profit, such as depreciation periods and revenue recognition.
- It does not show debt levels or asset quality; for that, read the Balance Sheet.
Frequently asked questions#
What is an income statement?#
A financial statement that shows a company's revenue, expenses and profit over a period, ending with net income and earnings per share.
What is the difference between gross profit and net income?#
Gross profit is revenue minus the direct cost of goods sold; net income is what remains after all expenses, interest and taxes.
Why do companies report adjusted earnings?#
To exclude items management considers unusual or non cash, though these adjustments can sometimes make results look better than they are.
Next, learn what a company owns and owes in the Balance Sheet.
3 quick questions on this lesson. Get them all right to finish it.
Turn on JavaScript to take the quiz.
Mentioned in
- Reading Financial StatementsFundamental Analysis
- Cash Flow StatementFundamental Analysis