profit_and_loss_statement [CapiPedia]

This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong.
====== Profit and Loss Statement (P&L) ======
The Profit and Loss Statement (also known as the '[[Income Statement]]' or 'P&L') is one of the three core [[financial statements]] that every public company must release. Think of it as a financial movie, not a snapshot. While the [[Balance Sheet]] tells you a company's financial position at a single point in time, the P&L tells you a story of its performance //over a period//, such as a quarter or a full year. In essence, it’s a report card that shows whether the business made money. It starts with the company's total sales (revenue) at the top and systematically subtracts all the costs and expenses incurred to generate that revenue. The grand finale at the bottom of the statement is the company’s [[Net Income]] – or net loss, if things went poorly. For a [[Value Investing]] practitioner, understanding the P&L is non-negotiable; it’s like a doctor reading a patient's chart to diagnose their health.
===== The Story of a Company's Performance =====
The P&L reads like a logical, top-down story. It’s designed to show you not just //if// a company was profitable, but //how// it achieved that profitability at various stages of its operations.
==== Deconstructing the P&L: A Top-to-Bottom Journey ====
Let's walk through the key lines you'll find on any P&L, from the most optimistic number at the top to the most scrutinized number at the bottom.
=== Revenue: The Starting Line ===
This is the "top line" and represents the total amount of money a company generated from selling its goods or services before any expenses are deducted. For a coffee shop, it’s the total cash received from selling lattes, croissants, and beans. It's the purest measure of a company's sales power.
=== Cost of Goods Sold (COGS) & Gross Profit: The First Hurdle ===
You can't sell lattes without coffee beans, milk, and paper cups. The [[Cost of Goods Sold (COGS)]] represents the direct costs tied to producing the goods or services a company sells.
The first key profit metric is [[Gross Profit]], calculated as:
  * Revenue - COGS = Gross Profit
This number tells you how much profit the company makes on its core product, before considering any other operational or administrative costs. A high Gross Profit suggests the company has strong pricing power and an efficient production process.
=== Operating Expenses & Operating Profit: The Cost of Doing Business ===
Next, we subtract the costs of running the business that aren't directly tied to the product itself. These are the [[Operating Expenses]], which include:
  * Selling, General & Administrative (SG&A) expenses: Think marketing, the CEO's salary, and the accounting department's wages.
  * Research & Development (R&D): Costs for innovation and creating new products.
By subtracting these from the Gross Profit, we arrive at [[Operating Profit]], often referred to by its famous acronym, [[Earnings Before Interest and Taxes (EBIT)]].
  * Gross Profit - Operating Expenses = Operating Profit (EBIT)
Operating Profit is a favorite of analysts like [[Warren Buffett]] because it reveals the profitability of the company's core business operations, stripping out the effects of debt (interest) and government policy (taxes).
=== The Bottom Line: Net Income ===
We're almost there! From Operating Profit, we subtract [[Interest Expense]] (the cost of borrowing money) and [[Taxes]] paid to the government. What remains is the celebrated "bottom line": Net Income.
  * Operating Profit - Interest - Taxes = Net Income
This is the profit that truly belongs to the company's owners, the shareholders. Net Income is used to calculate the crucial [[Earnings Per Share (EPS)]] metric, which is simply the Net Income divided by the number of shares outstanding.
===== Why Value Investors Love the P&L =====
A value investor doesn't just glance at the Net Income. They dissect the P&L to understand the //quality// and //sustainability// of a company's earnings.
==== Key Ratios and Insights ====
The P&L is a goldmine for calculating profitability ratios, which help compare a company's performance against its own history or its competitors.
=== Profit Margins: A Test of Efficiency ===
Margins tell you what percentage of revenue the company keeps as profit at different stages.
  - **[[Gross Margin]]** = (Gross Profit / Revenue) x 100. A high Gross Margin indicates a strong competitive advantage, or "moat."
  - **[[Operating Margin]]** = (Operating Profit / Revenue) x 100. This shows how efficiently the company is managing its overall business operations.
  - **[[Net Margin]]** = (Net Income / Revenue) x 100. This reveals the final profit generated for every dollar of sales.
=== Trend Analysis: The Bigger Picture ===
One P&L is a snapshot, but a series of them over five or ten years tells a powerful story. A value investor looks for:
  * **Consistent Revenue Growth:** Is the company steadily increasing its sales?
  * **Stable or Improving Margins:** Is the company maintaining its profitability as it grows? Or are costs spiraling out of control?
  * **Predictable Earnings:** Businesses with a long history of steady, predictable earnings are far easier to value and are often the best long-term investments.
===== A Word of Caution =====
While incredibly useful, the P&L is not perfect. It operates on //accrual accounting//, meaning it records revenues and expenses when they are incurred, not necessarily when cash changes hands. It also includes non-cash expenses like depreciation and amortization. This means a company can report a healthy profit on its P&L but still be running out of cash. This is why it's absolutely critical to analyze the P&L in conjunction with the other two key documents: the Balance Sheet and, most importantly, the [[Cash Flow Statement]].