The income statement, also known as the income statement (P&L), is the financial statement that describes the income, expenses, and net income generated by an organization over a specific period of time. It is one of the most audited financial statements published by any organization. And while the data in this document is relatively straightforward, a lot of useful information can be gleaned from it to help assess a company’s historical financial performance and develop an estimate of its outlook. For this reason, it is essential that users have a good understanding of the story that each income statement is trying to tell.
What does an income statement look like?
While almost no income statement is alike, they all have a common set of data: total income, total expense, and net income. While this represents the minimum amount of data that must be provided, additional details for each section are frequently included to give users a better overview of the organization’s financial activities. Some of the more common line items and the order in which they appear are listed below.
Product Level Revenue: This line item represents the revenue associated with a specific product that the company sells. There may be multiple lines if the organization sells multiple different products.
Cost of Goods Sold (COGS): This expense item shows the costs directly related to the product. For example, a stationery store lists the cost of pulp used to make paper in the COGS section.
Gross Profit: This is the amount of income remaining after subtracting the COGS. Simply put, it is the amount of income available to pay for operating expenses and to offset the property.
Selling, general and administrative (SG&A) expenses: this expense item is an aggregation of all costs related to the sale of the company’s product (s) and to the general functioning of the organization.
Interest expense: This operating expense item shows the amount of interest the business paid to finance its operations during the period.
How is it used?
Income statements are intended to provide users with an overview of an organization’s financial performance.Many metrics and analyzes can be developed with this data to provide more in-depth assessments of the organization. However, when used in business benchmarking, these metrics become valuable. In this type of analysis, income statement measures such as total revenue growth and gross profit margin are calculated for similar companies within an industry and compared to each other. For example, see the metrics associated with a pair of technology manufacturers below.
- Revenue growth: 12.6%
- Gross profit margin: 74%
- Net profit margin: 35%
- Growth in net income: 18.6%
- Revenue growth: 16.2%
- Gross profit margin: 67%
- Net profit margin: 35%
- Growth in net income: 19.6%
For an investor looking to buy shares of a tech maker, comparing the statistics of these two companies yields a number of information that is not obvious when viewed separately. Here are some of the conclusions that can be drawn.
- Based on revenue growth and net income, Alpha Systems outperforms TechOne. As the prospects for future growth are very important to every investor, Alpha Systems seems to be the most attractive option.
- TechOne has a lower COGS due to its higher gross profit margin than Alpha Systems. This suggests that TechOne may source inputs at a lower price than Alpha Systems, which could indicate an inherent competitive advantage.
- Although the two companies have the same net profit margin, Alpha Systems appears to have lower operating costs than TechOne based on the differences between gross and net profit margins. This implies that Alpha Systems operates its business more efficiently than TechOne.
Many other analyzes can be performed as part of any business benchmarking analysis using the income statement. The point is that any income statement analysis must include some form of benchmarking to give the reported numbers and associated metrics the necessary context. By doing this, investors, management and others can fully understand an organization’s financial performance and make informed decisions accordingly.