The income statement, also known as Income Statement in English, is a financial statement that reflects the company's profits (or losses) and expenses every quarter or year. It needs to be reported to the Securities and Exchange Commission (SEC) for filing. The income statement is also called the "profit and loss statement", and the English expression is Profit and Loss Statement (P/L Statement). Other English expressions include Earnings Statement, Statement of Income or Statement of Operations. The income statement is an important company financial statement, used together with the balance sheet and cash flow statement, to better analyze the fundamentals of a listed company. So, what data does the income statement mainly contain, and how to correctly interpret the company's income statement? This article will explain it to you in detail. The income statement shows the company's income and expenses during a specific period of time. Together with the company's Balance Sheet and Cash Flow Statement, it is the most important data statement to understand a company's financial status. Depending on the company's operating model, the income statement is usually published quarterly (Quaterly) or annually (Annually). The income statement is mainly composed of two parts: revenue (Revenue/Sales) and expenses (Expenses). The ultimate purpose is to calculate important information such as net profit (Net Profit) and equity per share (EPS). Several important concepts in the income statement are listed below: Revenue/Sales: Main operating income or total sales is the income earned by the company through operating activities during the income statement calculation period; Cost of Goods Sold: Cost of sales refers to the costs directly incurred by an enterprise in the process of producing or selling products, including materials, labor and manufacturing expenses. Operating Expenses: Operating expenses refer to the costs incurred by an enterprise during daily operations, excluding production costs, such as wages, rent, marketing expenses, and office expenses. Depreciation: Depreciation refers to the process by which an enterprise gradually allocates the cost of fixed assets due to wear and tear or technical aging during use, reflecting the decrease in asset value. Interest Expense: Interest expense refers to the interest cost paid by an enterprise for borrowing or debt financing. Income Tax Expense: Income tax expense refers to the tax calculated and payable by an enterprise in accordance with the provisions of tax laws. Let's take Apple's income statement on September 30, 2023 as an example. Let's introduce the common contents in the income statement. 1. Total revenue Total net sales refers to total revenue, also written as "Revenue", which indicates the revenue earned by the company during the income statement calculation period. This is the most important source of revenue for the company's operating activities. On the income statement, it is often marked with words such as "Net Sales" or "Revenue/Sales". Apple's income statement breaks down total revenue from products and services: Product revenue (Product)$298,085 million Services revenue (Services) $85,200 million Total net sales$383,285 million 2. Cost of sales Total cost of sales refers to the cost of sales, also often written as Costs of Goods Sold, or COGS for short. It refers to the costs that a company needs to spend in manufacturing and selling products. Apple's income statement lists the cost of sales of products and services separately: Product sales cost (Product)$189,282 million Cost of sales of services (Services) $24,855 million
Total cost of sales$214,137 million 3. Gross profit Gross profit, also known as Gross Profit or Gross Income in English, is the remaining income after deducting the cost of goods sold, and is calculated as follows: Gross Profit = Total Revenue – Cost of Goods Sold In Apple's income statement, there is a small error. Gross profit should be expressed as Gross Income instead of Gross Margin. Gross Margin often refers to gross profit margin, which is a ratio, usually expressed as a percentage. 4. Operating expenses Operating expenses, in English, are Operating Expenses, or OpEx for short, which refers to the company's various operating expenses, including employee wages, real estate rent, daily management, advertising and marketing, scientific research and innovation expenses, etc. In general, all expenses excluding the cost of sales, interest expenses, and income tax expenses can be classified as operating expenses. It's important to note that depreciation and amortization expenses are also often classified as operating expenses. Here we focus on two of the operating expenses: Research & Development: Research and development expenses refer to the company's expenses for research and development, which are usually one of the main expense components of some high-tech companies. Selling, General and Administrative: Refers to selling expenses, general expenses, and administrative expenses, often abbreviated as SG&A. 5. Operating profit Operating profit, also known as Operating Income or Operating Profit in English, is the remaining profit after deducting operating expenses from gross profit. The calculation formula is as follows: Operating profit = gross profit – operating expenses 6. Other income or expenses, net The net value of other income or expenses, English is Other Income/(Expense) Net, refers to the net value of other income or expenses, such as the net value of interest expenses and interest income. 7. Profit before tax Profit before tax, expressed here as “Income before provision for income taxes”, refers to income without deduction of income taxes. 8. Estimated income taxes Estimated income taxes, or Provisions for income taxes in English, refer to the taxes a company needs to pay on profits, that is, the taxes the company needs to pay to the federal government and state governments. 9. Net profit Net profit, also known as Net Income in English, is the part of a company's profit excluding all expenses. It is an important indicator of a company's profitability. 10. Earnings per share Earnings per share, in English, is Earnings per share, or EPS for short, which refers to net profit per share, also known as "US stock earnings" or "earnings per share". It indicates the income that each share of a company's stock can bring to shareholders in the public trading market. Its calculation formula is as follows: Earnings per share = Net profit ➗ Number of shares outstanding Earnings per share can be divided into two types: basic earnings per share and diluted earnings per share: 1) Basic earnings per share (Basic EPS in English). When calculating, the number of circulating shares used only considers all the company’s shares circulating on the market (Basic Shares Outstanding). The calculation formula is as follows: Basic earnings per share = net profit / current number of shares outstanding 2) Diluted earnings per share, English is Diluted EPS. When calculating, the number of outstanding shares used includes all diluted outstanding shares including outstanding shares, employee stocks, warrants, etc. The calculation formula is as follows: Basic earnings per share = net profit / number of diluted shares outstanding What other items might the income statement include? In addition to the important content above, you may also see the following items in the income statement: Earnings before interest and taxes (EBIT)
Earnings before interest and taxes (EBIT) in English is the income before interest and taxes. The calculation formula is as follows: EBIT = Net Income + Interest + Taxes Earnings before interest, taxes, depreciation and amortization (EBITDA) Earnings Before Interest, Taxes, De-preciation and Amortization (EBITDA) is the income before interest, depreciation, taxes and amortization. Consolidated Net Income Consolidated Net Income Consolidated net income in English is Consolidated Net Income. When a company has subsidiaries, the net profits of the subsidiaries and the parent company are added together to form the consolidated net income. Preferred Dividends Preferred stock dividends in English are Preferred Dividends, which are dividends distributed preferentially to shareholders who hold the company’s preferred shares. Income statement analysis case This chapter uses Amazon’s income statement in the past three years to interpret the important information of the income statement: Amazon's revenue mainly consists of selling products and providing services. Total income in 2018 was $232,887, in 2019 it was $280,522, and in 2020 it was $386,064. Amazon's operating expenses include sales costs, marketing department expenses, technical department expenses, general administrative expenses, etc. The total sales expenses in three years are: $220,466, $265,981, and $363,165 respectively. In terms of operating income, the three years were $12,421, $14,541, and $22,899 respectively. In terms of non-operating income/expenses, it mainly consists of interest income, interest expenses and other income/expenses. Expenditures in 2018 were $1,160, expenses in 2019 were $565, and income in 2020 was $1,279. Therefore, the three-year pre-tax income is: $12,421 – $1,160 = $11,261, $14,541 – $565 = $13,976, $22,899 + $1,279 = $24,178, and continues to grow in three years. After deducting various taxes and fees, the net income in the three years was $10,073, $11,588, and $21,331 respectively. Based on the market share of shares outstanding at that time, the basic earnings per share for three years were: $20.68, $23.46, and $42.64. Therefore, for large-scale companies, a more detailed multi-step income statement is needed to completely show all the company's profits and expenses and other information. How to check a company's income statement? For listed companies, the income statement is a public financial statement. You can view a company's income statement in a variety of ways. For example, directly search for "Investor Relations site: plus company URL" on Google, or search for the company name from third-party financial websites, such as Marketwatch.com, Yahoo finance, Morningstar, MSN Money, etc., to view its income statement. You can also search for the company name on the SEC website, and then view its income statement. On your boss's company's homepage or the SEC, you are likely to find the company's Form 10-K. Form 10-K is a comprehensive report on its financial performance that all listed companies in the United States must submit every year. From it, you can find the company's income statement.
According to the requirements of federal securities laws, public companies must continuously disclose information in Form 10-K every year. The annual report in Form 10-K provides a comprehensive overview of the company's business and financial status, and also contains audited financial statements. Under SEC rules, companies with $700 million or more in public float must file their 10-K within 60 days of the end of their fiscal year. Companies with floats between $75 million and $700 million have 75 days, while companies with floats below $75 million must file within 90 days. Method One: Use Google Search Take searching for Apple's income statement as an example. Use Google to search and find Investor Relations on the official website of the listed company. The specific steps are as follows: Step 1: Search Google and enter investor relations site:apple.com Step 2: From the search results, find the 10-K form published on Apple’s homepage, as shown below: Step 3: Click on Form 10-K and find the corresponding income statement section from the form: Method 2: Search from third-party financial websites These websites include Marketwatch.com, Yahoo finance, Morningstar, MSN Money, Reuters, etc. The following takes Yahoo Finance as an example: Step 1: Log in to the Yahoo finance main website and enter the company name or ticker in the search box at the top of the page. For example, for Apple, you can enter AAPL Step 2: After entering the company data page, click Financials in the data column Step 3: Then you can view the company’s financial disclosure data in recent years: Method 3: Find the 10-K form of the listed company from the SEC main website You can enter the SEC main website through Google search, or you can directly enter the search page of the SEC main website. Enter the company name to view the company's multiple public financial statements. Use Google search and use the keyword "apple income statement site:sec.gov". The search results are as follows: Click on the first option to find Apple's Form 10-K. How to use the income statement for investment analysis? The income statement can not only visually display the company's income and expenses during a specific period of time, but also use these data to calculate and analyze the values of multiple company operating indicators in addition to profit margins and earnings per share: profit margin Profit margin, also known as Profit Margin in English, is calculated as the ratio of net sales to net sales after a company subtracts all expenses required. It can be divided into pre-tax profit rate and after-tax profit rate according to whether taxes are deducted. Profit margin = Profit ➗ Total revenue The higher the profit margin, the higher the ability of the company's sales process to convert into actual profits during its operations. operating profit margin Operating profit margin, also known as Operating Margin in English, is a judgment value for the efficiency of a company in obtaining profits through operations. It is the ratio of a company's operating income to all income. Operating profit margin = operating income ➗ revenue The higher the operating profit margin, the higher the proportion of the company's revenue that is derived from operations, and the higher the efficiency of the company in obtaining profits through sales. P/E ratio The price-to-earnings ratio, or P/E Ratio in English, can be used to value the shares offered by a company. The value of the price-to-earnings ratio means the amount that investors need to pay for every dollar of earnings. P/E Ratio = Market Capitalization ➗ Net Profit The higher the P/E ratio, the higher the amount you have to pay for one dollar of earnings, which means you will end up with less earnings. interest coverage ratio Interest coverage ratio, in English, is the Interest Coverage Ratio, which is the ratio of EBIT to interest expenses. It is a measure of a company's ability to pay interest payments when due. Interest Coverage = EBIT ➗ Interest Expense
The higher the interest coverage ratio, the more capable the company is to pay the interest due, and loan lenders are more willing to lend money to companies with a high interest coverage ratio. return on equity Return on equity, also known as Return on Equity in English, is one of the most important reference values for investors when choosing investment objects. It marks the company's efficiency in converting shareholders' investments into profits. Return on Equity = Net Profit ➗ Shareholders’ Equity The higher the return on equity number, it means that the company can more efficiently convert shareholder investments into profits. return on assets Return on Capital, also known as Return on Assets in English, is an important indicator of a company's management and production capabilities. Return on assets = Net profit ➗ Total assets The higher the return on assets, the higher the company's ability to earn profits and its ability to save funds. Asset Turnover Ratio Capital turnover ratio, also known as Asset Turnover Ratio in English, indicates the operating income that a company can generate by using each dollar of assets, and represents the company's operating profitability. Asset turnover rate = Operating income ➗ Average total assets The higher the value, the more efficient the company is in converting assets into income and the more ideal its operational capabilities are. Income Statement vs Balance Sheet The income statement and balance sheet are the two most important statements in a company's financial statements. Through these two tables, you can understand a company's assets and debts, and analyze the company's operations by comparing data sheets in different periods. But there are also differences between them: Different purposes The income statement is used to show the income and expenses that a company can generate during a period of time, expressing the company's operating performance during a specific period of time; The balance sheet represents the assets owned by the company, debts owed to external parties, and the equity owned by shareholders at a specific point in time. The calculation time is different Income and expenses over a period of time when an income statement is used; The balance sheet reflects assets, liabilities, and shareholders' equity at a specific point in time. Different uses The purpose of the income statement is to help evaluate whether a business is profitable during a specific time period and the differences in profitability between different divisions in the operating structure; The purpose of a balance sheet is to help assess whether a business has sufficient ability to meet its debt obligations. Credit income is calculated in different ways When the company's long-term partner proposed to place an order on October 1st and then pay for the order on November 1st. If the calculation date of the income statement is from October 1 to October 31, because the order has not received payment, it will not be included in the income statement; If the balance sheet is calculated between October 1 and October 31, the order will be included in the company's assets. American brokerage U.S. Brokerage Ranking and Comparison [2024] Recommended Top 12 U.S. Brokerages