What is an income statement?

An income statement, also known as a profit and loss (P&L) statement, tracks a company's revenue, expenses, and net income over a specific period, such as a quarter or a year.

What is the difference between an income statement and a balance sheet?

An income statement tracks performance over a period of time (like a video), while a balance sheet tracks financial position at a single point in time (like a photo).

What is a multi step income statement?

A multi step income statement segregates operating revenue and operating expenses from non-operating items. It provides intermediate totals like Gross Profit and Operating Income, offering deeper insight into business efficiency.

How do you calculate net income?

Net Income is calculated by taking total Revenue and subtracting all costs, including Cost of Goods Sold (COGS), operating expenses, interest, and taxes. It is often called 'the bottom line'.

What are operating expenses?

Operating expenses (OpEx) are the costs required to run the core business day-to-day, such as rent, utilities, salaries, and marketing, but excluding the direct cost of producing the product (COGS).

← Back to Financial Statements

Income Statement Demystified: The Investor's P&L Guide

A movie of a company's financial performance over a period of time.

Introduction: Did We Make Money?

While the balance sheet shows what a company is, the income statement (also called the Profit and Loss or P&L statement) shows what a company did. It captures all the activity between two points in time—usually a quarter or a year.

For investors, the income statement is the primary tool to evaluate growth and efficiency. If revenue is growing but net income is shrinking, it may mean the company is becoming less efficient or facing rising costs.

Income Statement Performance Diagram showing Revenue, Operating Income, and Net Income flow

The "Bottom Line" Ladder

Revenue (Sales)The Top Line

↓ Minus COGS

Gross ProfitProfitability of Product

↓ Minus OPEX

Operating IncomeCore Business Health

↓ Minus Taxes/Interest

Net IncomeThe Bottom Line

Breaking Down the Components: GAAP Essentials

While Revenue and Net Income are the most discussed figures, the "middle" of the statement holds the secrets to a company's durability. Here are the professional terms you need to know:

1. Revenue (The Top Line)

Total sales generated. Note: Under GAAP, revenue is recorded when the service is earned, not necessarily when the cash hits the bank.

2. SG&A (Selling, General & Administrative)

These are the overhead costs—everything from marketing budgets to office rent and corporate salaries. Efficient companies keep SG&A low relative to their gross profit.

3. EBITDA (The "Real" Cash Proxy)

Earnings Before Interest, Taxes, Depreciation, and Amortization. It helps analysts compare companies with different debt structures or tax environments.

4. EBIT (Operating Income)

This shows how much profit the core business makes before accounting for how the business is financed (Interest) or tax obligations.

5. EPS (Earnings Per Share)

The "Bottom Line" divided by the number of shares outstanding. This is what you, as an individual investor, actually "own."

🚩 6 Income Statement Red Flags

If you see these patterns while analyzing a stock's performance, dig deeper:

1. Declining Margins while Revenue Grows: The company is selling more but becoming less efficient, often due to a price war or rising material costs.
2. Frequent "Non-Recurring" Expenses: If a company has "one-time" restructuring charges every single year, they are likely hiding normal operating costs.
3. Interest Expense Exceeding EBIT: The company is spending more on debt payments than it makes from its business operations—a high-risk signal.
4. Revenue Growing faster than Cash Flow: (The bridge to the Cash Flow Statement). This suggests "aggressive" accounting or difficulty collecting payments.
5. Massive Share Dilution: If Net Income is growing but EPS is flat, the company is issuing too many new shares, effectively stealing your piece of the pie.
6. Relying on "Other Income": If a company's profit comes from selling assets or investment gains rather than selling its actual product, it's not a sustainable business.

Analyzing Like an Intelligent Investor: Margins & Efficiency

Gross Margin

Formula: (Revenue - COGS) / Revenue. It shows if a company has a competitive advantage (Moat). High margins suggest pricing power.

Operating Margin

Formula: EBIT / Revenue. Tells you how much is left after all the day-to-day costs of running the business.

Net Margin

Formula: Net Income / Revenue. The final efficiency score—how much profit reaches the shareholders.

Interconnectivity Tip: Net Income vs. Equity

Where does the Net Income go? It flow directly into the Balance Sheet under "Retained Earnings." This is how a business builds its actual wealth (Equity) over time. If a company isn't profitable, its equity will shrink, making it more dependent on debt.

Intelligent Investor Checklist: Income Statement Edition

✅ Is Revenue growing consistently over the last 3-5 years?
✅ Are Gross and Operating Margins stable or expanding?
✅ Is Net Income positive (actually making money)?
✅ Is "Interest Expense" easily covered by Operating Income (EBIT)?
✅ Is the number of shares outstanding stable (avoiding dilution)?