I am an Equity Fund Manager and have an MBA.
Being able to read an income statement is CRUCIAL to make good investment decisions.
I'll teach you how to analyze an income statement in 5 minutes:
Being able to read an income statement is CRUCIAL to make good investment decisions.
I'll teach you how to analyze an income statement in 5 minutes:
An income statement is also called a profit and loss account.
It shows the company's revenues and expenses over a certain period.
Via an income statement, you can see how much revenue is translated into net income.
It shows the company's revenues and expenses over a certain period.
Via an income statement, you can see how much revenue is translated into net income.
It all starts with revenue.
Revenue is the money a company generates by selling its products/services.
You want a company that manages to report consistently increasing revenues over the years.
Revenue is the money a company generates by selling its products/services.
You want a company that manages to report consistently increasing revenues over the years.
Gross profit
The profit a company makes after deducting the costs associated with making and selling its products (Costs Of Goods Sold).
The profit a company makes after deducting the costs associated with making and selling its products (Costs Of Goods Sold).
Operating income
Operating income is calculated by subtracting operating expenses from a company's gross profit.
Operating expenses include all costs to run a company's daily operations (salaries, R&D, market, ...).
Operating income is calculated by subtracting operating expenses from a company's gross profit.
Operating expenses include all costs to run a company's daily operations (salaries, R&D, market, ...).
Pre-tax income (earnings before tax)
The net income of a company before taxes are subtracted.
Pre-tax income = operating income - interest expenses
The net income of a company before taxes are subtracted.
Pre-tax income = operating income - interest expenses
Net income
Net income = pre-tax income - taxes
You want a company that translates most revenue into net income.
Net income = pre-tax income - taxes
You want a company that translates most revenue into net income.
Questions to ask yourself about an income statement:
1οΈβ£ Are revenues steadily increasing over time?
2οΈβ£ Does the company need a lot of COGS to sell its products?
3οΈβ£ How much revenue is translated into net income?
1οΈβ£ Are revenues steadily increasing over time?
2οΈβ£ Does the company need a lot of COGS to sell its products?
3οΈβ£ How much revenue is translated into net income?
These were the basics of an income statement.
Want more? Learn everything about free cash flow in the article below.
βͺοΈ Each Tuesday we share 5 investment insights
βͺοΈ Each Thursday we publish a deeper investment article
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Want more? Learn everything about free cash flow in the article below.
βͺοΈ Each Tuesday we share 5 investment insights
βͺοΈ Each Thursday we publish a deeper investment article
Start your journey here:
qualitycompounding.substack.com
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