How to analyze an income statement of a company
How the investors will analyze a company regarding the performance and financial information like the profits and losses with a certain reporting period.
What is an income statement?
The income statement is a part of a company's financial statement, and it reports the financial performance of the company over a specific period. Investors can understand the company losses, profits, earnings, etc over a period by referring to the income statement.
Sample income statements
What you can find in the income statement(income statement items)?
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Total Revenue
Total revenue is the total earning that a company receives from its sales and services.
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Gross Profit
The Gross profit of a company can be calculated by reducing the production and sales cost of its products and the service cost from the company revenue.
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Total Operating Expenses
The operating expense of a company includes salaries of the employees, rent of the buildings, research and development costs, marketing expenses, maintenance costs of equipment, etc.
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Operating Income
Operating income is calculated by reducing the operating expenses from profit earned from business operations.
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Net Income Before Taxes
Net Income Before Taxes can be calculated by reducing the expenses excluding tax, and interest from the revenue. It is an indicator of the profitability of a company.
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Net Income After Taxes
Net Income After Taxes can be calculated by reducing the expenses from the revenue. It is a indicator of profitability of the company.
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Net Income
Net income can be calculated by reducing all expenses including costs and the taxes from revenue. Also called Net profit, Net earning.
How to use the income statement for evaluating the best stocks to pick?
- You can start analyzing the income statement from the net income. The net income amount will be positive if the company performing well. If the net income amount is gradually increased with time, then that may be a good sign of the company's future.
- You understand how the depreciation affected the profit of the company during a specific time.
- Investors can get more information about tax payments and compare it with previous quarters and years of data. It will help to get a broad understanding of the company's and can be used to get an idea about the future tax payments.
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There are some stock ratios calculated from the income statement. Investors can use income statement analysis to calculate financial ratios that can be used to compare the company's progress over a period or to compare one company to another.
For example, you can compare one company's profits to its competitors' or industry average by examining its indicators. For example,
- Earnings per share (EPS)
- Gross profit margin
- Operating profit margin
- Net profit margin
- Investors can understand the seasonalities of the sales by analyzing the multiple income statements for different periods. If the company operations are affected by the seasons, you can find regular cycles of income or revenue (seasonal peaks or falls of revenue).
Importance of the income statement
- The income statement provides information about a company’s performance during a specific period.
- It will give you all the revenue and the expenses during the period.
- By comparing the year by year or quarter by quarter income statements, you will be able to predict the future performance of the company.
- Comparing the income statement against the competitors will help you to select the best stock to buy in the industry.
- You can compare each property against the industry average will help to get an understanding of where the company position in the industry.
What is lacking in the income statement?
- The income statement is based on accounting rules but does not reflect cash movements.
- There is a chance of manipulation of financial details in the income statement.
- The income statement cannot use for future predictions because it only tells financial performance during a specific period.