Income Statement

An income statement shows how much a company earned and spent over a period. Revenue sits at the top, costs are subtracted in stages, and net profit is what remains at the bottom.

Reading top to bottom reveals the structure. Revenue minus cost of sales gives gross profit; minus wages and marketing gives operating profit; minus interest and tax gives net profit. Each step shows what is consuming the money.

The most important line is operating profit, because it shows what the core business earns. Net profit can swing sharply on one-off items such as selling property or a currency gain.

Be wary when revenue grows and operating profit does not — costs are rising alongside sales. The reverse, flat revenue with rising operating profit, means efficiency improved.

Lining up several years is far more useful than reading one. A single year turns on unusual events, while a three-to-five-year trend shows where the company is actually heading.