The Income Statement
The income statement contains numbers such as revenue, earnings and earnings per share. This statement shows how much money the company generated (revenue), how much it spent (expenses) and the difference between the two (profit) over a certain period of time.
The income statement shows investors know how well the company’s business is performing and whether or not the company is making any money. Companies need to bring in more money than they spend or they might not stay in business for long.
Revenue, also known as sales, represents all the money a company brought in during a specific time period. One way for a company to improve profitability is by increasing sales revenue. The best revenues are those that are consistent year in and year out. Temporary increases, which might result from a short-term promotion, are less valuable and should warrant a lower price-to-earnings multiple (more on this multiple) for a company.
Cost of goods sold (COGS) and selling, general and administrative expenses (SG&A) are the two most common kinds of expenses. While COGS represents the costs of producing or purchasing the goods or services sold by the company, SG&A includes marketing, salaries, utility bills, technology expenses and other general costs associated with running a business.
Profit is the difference left over when expenses are subtracted from revenues. Companies with high margins will have plenty of money left over to spend on other business operations, such as Research & Development or marketing. Keep on the lookout for downward trends in the margin rate over time. When cost of goods sold rises quickly, it will likely lead to lower gross profit margins (hence less profit) unless the company can pass these costs onto customers in the form of higher prices.
Valuable insights about a company can be gained by simply examining its income statement. Increasing sales is a sign of strengthening fundamentals. Rising margins indicate increasing efficiency and profitability. It’s also a good idea to examine a company’s competitors to see if a certain cause is affecting the whole industry.
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