How to read a profit & loss statement

Hello, I am Umesh Tripathi and we are learning the concepts of Fundamental Analysis. In this video we will learn about the Profit Loss Statement. What is a Profit Loss Statement? What are the components of the Profit Loss Statement and at the end of it we will see an example of a Profit Loss Statement.

So basically whenever we talk about the Profit Loss Statement, from the Profit Loss Statement we get to know about the company’s revenues and expenses. So the Profit Loss Statement is basically a financial statement which talks about the overall company’s sales record, expenses records, resulting in overall loss or profitability in a certain period. So we also call the Profit Loss Statement the Income Statement.

Here to calculate the Profit Loss Statement, we simply consider the overall sales of the particular company. In them we add other income such as interest income or dividend income and subtract all other expenses from it. So we finally derive whether the company is profitable or loss making in a certain time period.

Here there are some key components that we see in the Profit Loss Statement. We should know about these key components. Revenue is a key component. We also call revenue sales. So basically whatever the company is making as income by selling goods or services comes under revenue. For example, a company called A earns ₹1 lakh from sales of its products. On the other hand, there can be a company which does not have any product to sell but it is selling a service, that is, it is providing a service. Suppose it is a service company that is generating certain revenue by selling a certain service.

Along with this, Cost of Goods Sold i.e., COGS, which is direct cost related to production of goods sold. Here, for example, whatever labor cost is there for a particular company comes under this. Raw materials and manufacturing cost come under COGS.

Along with this, an important component in the Profit Loss Statement is Gross Profit. If we subtract Cost of Goods Sold from Revenue, then we get Gross Profit. So basically Gross Profit shows the efficiency of the core business operations.

Along with this there is a component called Operating Expenses. Now here Operating Expenses means the expenses that the company bears to run the business come under Operating Expenses. For example, Advertising and the Sales team come under Selling Expenses, and under General and Administrative Expenses come rent or whatever salaries the company is paying to employees or whatever utilities are there  their expenses come

under Operating Expenses. Keep in mind that interest and taxes are not considered here. Okay?

Along with this, an important component is Operating Profit. Operating Profit is basically earnings before the interest and taxes. So when we subtract the Operating Expenses from the Gross Profit we get the Operating Profit.

Along with this, in the Profit Loss Statement there can also be other expenses and income. For example, whatever losses or gains the company makes on investments, their information, and the interest income as well.

Along with this, Profit Before Tax is also a component in the Profit Loss Statement. So basically Profit Before Tax is Earnings Before Interest and Taxes i.e., EBIT plus Other Income minus Other Expenses.

Along with this, Tax Expenses is also a component in the Profit Loss Statement. So basically the information about the tax that the company has to pay on its profits is seen under Tax Expenses.

Along with this, at the bottom line in the Profit Loss Statement we get to see Net Profit, which is also called Profit After Tax. So Profit After Tax means the final profit by the company after excluding all the expenses and taxes.

Along with this, Earnings Per Share i.e., EPS is also a component on the Profit Loss Statement. Basically, when we have calculated the Net Profit here or we have received the information of Net Profit, then from there we can easily calculate EPS. So when we divide the Net Profit by the number of outstanding shares in that particular company, we get the data of EPS i.e., Earnings Per Share. Keep in mind this EPS component of the Profit Loss Statement is seen on the Profit Loss Statement of a publicly listed company. Okay?

Now the question comes here: how to read the Profit Loss Statements. So basically in the Profit Loss Statement we have the information of Revenue, where we have to figure out Revenue Growth. Along with this there is the information of Expenses. And at the bottom of it we have the information of Net Profitability. So basically we focus on Revenue Growth. We look at margins — where Gross Margin is equivalent to Gross Profit divided by Revenue. We look at the information of Operating Margin  where Operating Profit is divided by Revenue and we look at the information of Net Margin  where Net Profit is divided by Revenue. So higher margins often indicate good cost control and strong pricing power.

Keep in mind whenever you are reading the Profit Loss Statement, look carefully at the columns of Revenues and Expenses and see what their trend has been. Are the Revenues increasing year on year? Are they stable? Are the Revenues consistently on a growth path

year on year? Are they very volatile? Are we seeing consistency in them? We get all this information from the Profit Loss Statement. Keep in mind whether the Expenses have not been growing rapidly in the last one, two or three years  this information we should also know how to read from the Profit Loss Statement.

Along with this, we have the EPS data, right, in the Profit Loss Statement. So we should also figure out the EPS trend whenever we are reading the Profit Loss Statement. If the EPS trend is growing, then this is a positive sign for the investors.

Okay? Now here we take an example of a Profit Loss Statement. Suppose there is a certain company whose Profit Loss Statement we are looking at here. The company’s Revenue is ₹1,000 crore. Here the Cost of Goods Sold i.e., COGS of the company is ₹600 crore. Gross Profit here comes out as Revenue minus Cost of Goods Sold, which is ₹400 crore. Here Operating Expenses — that is, whatever expenses are there to run the company — are ₹200 crore. So basically the Operating Profit here is coming out to ₹200 crore, i.e., EBIT — Earnings Before Interest and Taxes — which is Gross Profit minus Operating Expenses — here it is coming out to ₹200 crore. Other Income of the company is ₹20 crore. Here Interest Expenses, which is a non-operating expense, is ₹30 crore. So Profit Before Tax is coming out to ₹190 crore. The company has paid tax of ₹50 crore. And overall, after calculating this, the Net Profit i.e., Profit After Tax coming out for the company is ₹140 crore.

Now if you pay attention here, at the bottom we see EPS i.e., Earnings Per Share of 14. So basically whatever profitability the company has generated here, if we divide that profit by the number of outstanding shares, we get to see EPS. So here basically the Earnings Per Share is coming out to 14. So from this example we understand that this particular company is not only profitable but its EPS is also around 14.

After reading this Profit Loss Statement, we should also read the company’s Profit Loss Statements of other years. Because when we analyze the Profit Loss Statements of the previous years of this particular company in this particular example, we will actually be able to figure out whether the company has been making progress in terms of sales and making progress in terms of overall profitability, and also we will be able to figure out its overall EPS track record — that is, whether the track record of Earnings Per Share is consistently growing or not. So all this is very important for us whenever we are reading the Profit Loss Statement of any particular company under Fundamental Analysis.

Keep in mind, for different industries or different sectors, this data in the Profit Loss Statement can be different. Ahead, when we will do sector-wise analysis, the matters will become clearly understandable there.

So from this video we learned that the Profit Loss Statement tells us about the profitability metrics of a certain company and also helps us figure out the overall trend and business health. Along with this it also helps us to compare with peers — that is, under financial statements, the Profit Loss Statement. We can compare different companies of a similar industry when we have Profit Loss Statements under financial data for different companies. It is basically an essential tool for investors, analysts and managers. Keep in mind, always compare multiple periods to get a long-term perspective while you are doing Profit Loss Statement analysis. And on top of this, it is better to combine the Profit Loss Statement with the Cash Flow Statement and Balance Sheet Statement for complete analysis.

So that is all in this video. We will meet in the next video.

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