In this video, I am going to teach you how to read and analyze an income statement.
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Income statement analysis is an important skill for anyone who wants to understand their financial situation.
We will start by looking at the different sections of the income statement, and then we will teach how to use the data in the statement to make informed business decisions.
If you want to learn how to read and analyze an income statement, then this video is for you! By the end of this video, you’ll be able to understand your own financial situation and make informed business decisions.
What is an Income Statement? An Income Statement will show you the profit or loss a company generated over a certain period of time, usually a quarter or a year. It is one of the three core parts to look for in a Financial Statement, with the other two being the Balance Sheet and the Cash Flow statement.
An Income Statement will show you the profit or loss a company generated over a certain period of time. It focuses on four key areas: Revenue, Expenses, Gains and Losses. It is by far the most populated part of any financial statement and you could get overwhelmed just by looking at it, but after we break it down to parts and point out the sections you need to focus on it will seem much easier.
All Income Statements start with the Total Revenue of the company, which is also called top line, since it’s the first number on the income statement, and is the money the company made from selling its goods and services.
It goes without question that every company has expenses to operate, produce and sell its products, those costs are summarized under the name of Total operating expenses, and in the trading view format this figure will be found on the bottom of the report.
Now let’s turn our attention to Gross profit, what it is and how it is calculated. Gross Profit is the profit a business makes after subtracting all the costs that are related to manufacturing and selling its services or products.
There is always a negative sign prior to the number as this number is always negative. Once we subtract the cost of goods sold from the total revenue we will get the Gross profit.
Moving down the statement we have the operating expenses which as you can guess are expenses associated with running business operations, like paying salaries, advertising,rents office supplies and so on. These expenses are not taken into account in the cost of goods sold and need to be further deduced from the gross profit, in order to get the operating income.
Adding operating income with non operating income will give you the Pretax Income which is the company’s revenue after we deduct all operating and non operating taxes, which is considered a more accurate measure of business performance and health.
Now that we went through the Income statements lets focus on the key metrics that determine if the company is strong or weak financially.
First the Total Revenue which as we mentioned is the money the company made after selling goods and services. A solid business will have its total revenue increase over the years.
Second the Total Operating Expenses which are the total expenses that are incurred over a given period of time as a result of normal business activities. This number needs to always be lower than the Total Revenue, if it is not is a huge red flag for the health of the business.
Third, the Gross Profit which is the profit a business makes after subtracting all the costs that are related to manufacturing and selling its services or products. We want to see a positive and growing number here as well.
Fourth is the operating income which is measuring the amount of profit generated from business operations, after deducting operating expenses, such as wages, depreciation and cost of goods sold. We want to always see a positive and growing number over the years here, as this means the company is making profit, a negative number here means that the company is operating at a loss. In our example, Amazon is producing a solid 24.94 Billion for 2021 which means the company is generating profits, and they are up from previous years as well.
Firth net income. As we mentioned above the most important metric in the income statement is the Net income, solid companies will always have a positive and a growing number in this section.
Last two metrics that are highly advisable to calculate and are good indicators to analyze a company’s income statement are the Gross Margin and the Operating Margin.
Gross Margin shows whether the company’s sales are enough to cover their costs. To calculate the gross margin you need to divide Gross Profit with Gross Revenue.
The other metric to calculate is the Operating Margin, which measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax.To calculate that you need to divide the operating income with the Total Revenue.
To mention here that TradingView and other websites provide these metrics so you don’t have to calculate them, if you click statistics you will find many useful rations including the Gross and Operating Margin.
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