Income /P&L statement

Income statement /Profit & Loss statement

The income statement is also sometimes referred to as the statement of income, profit and loss statement (P&L) or statement of operations. The income statement illustrates the profitability of a company over a given period of time. This statement typically includes one section detailing revenues and gains and another section detailing expenses and losses. If the company's revenues and gains are greater than its expenses and losses, then the income statement will show a net profit. However, if the company experiences greater expenses and losses, the income statement shows a net loss. In other words, the income statement shows whether the company turned a profit within the period.

I focus on companies which earn a lot of money (topline), use minimum amount to earn that money, pay due amount of taxes on its profits and increase the sales (topline) & earnings (bottomline) year on year.

Income from Operations

Net Sales / Income from Operations /Gross Sales (or sales or revenue)

  • These all refer to the value of a company's sales of goods and services to its customers. Even though a company's "bottom line" (its net income) gets most of the attention from investors, the "top line" is where the revenue or income process begins. Also, in the long run, profit margins on a company"s existing products tend to eventually reach a maximum that is difficult on which to improve. Thus, companies typically can grow no faster than their revenues.
  • Excise Duty
  • Gtross Sales also includes excise duty.
  • Net Sales/ Income from Operations = Gross Sales - Excise Duty

Other operating income

  • This includes income form other sources like rebate in export duty, sale remains of the raw material (Egg sheels in case of SKM egg)

Total income from Operations

  • Net sales + other income

Expenses

Cost of material consumed (COGS)

Cost of Sales (a.k.a. cost of goods (or products) sold (COGS), and cost of services). or Raw material cost.

For a manufacturer, cost of sales is the expense incurred for

  • raw materials,
  • labor and
  • manufacturing overhead used in the production of its goods. While it may be stated separately, depreciation expense belongs in the cost of sales.
  • For wholesalers and retailers, the cost of sales is essentially the purchase cost of merchandise used for resale.
  • For service-related businesses, cost of sales represents the cost of services rendered or cost of revenues.

(To learn more about sales, read Measuring Company Efficiency, Inventory Valuation For Investors: FIFO And LIFOand Great Expectations: Forecasting Sales Growth.)

Purchases of Stock in trade

Changes in inventories of finished goods , work in progress and stock in trade

Change in inventory (CIN) means (opening stock - closing stock.) +ve figure for CIN means the company could not sell the existing inventory. -ve figure (closing stock was more than opening stock) means company is building up new stocks.

Employee benefit Expenses

Depreciation and amortization expenses

  • Depreciation is a method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.
  • For accounting purposes, depreciation indicates how much of an asset's value has been used up. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken based on what the asset is and how long it will last.
  • Depreciation is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn. For example, if a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year, the company will expense $100,000 (assuming straight-line depreciation), which will be matched with the money that the equipment helps to make each year. Currency and real estate are two examples of assets that can depreciate or lose value.
  • Depreciation is a real expense. It is the adjustment of the cash outflow that the company had in the year of plant setup, however, this cash outflow was not shown in P&L as an expense as the asset would be used for many years. If the investor does not reduce this cash outflow of establishing the plant in the year of plant setup and also does not allow depreciation expense, then the cumulative PAT is going to be grossly inflated.

Power and Fuel

Packaging material, Stores & Spares

Other Expenses

Total Expenses

Earnings/Profits

Profit from operations before other income, finance costs and exceptional items

Operation Profit = Income from Operations - expenses

Other Income

Profit from ordinary activities before finance costs and exceptional items

Profit from operations before other income, finance costs and exceptional items + Other Income

Also known as EBITDA

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization and measures the operating performance of a company before accounting conventions and non-operational charges (such as taxes and interest).

EBITDA tells the investor, the profit that the company is making from its operations. If the EBITDA is negative, then it is a very negative sign because it means that the company is losing money in its core profitability. The EBITDA margin is computed as a percentage of sales and EBITDA. For instance, in a company had sales of Rs. 100 and an EBITDA of Rs. 12, its EBITDA margin would be 12%. The higher the margin, the better it is.

Finance costs (Interest Cost)

Finance costs includes interest expense, and income tax expense.

Interest cost along with other costs of creating the plants/fixed assets like land, building, machinery, logistics etc. are capitalized (It is spread across many years ). The logic is that even though these costs are incurred in the year in which the plant/fixed asset is created, however, the plant runs a longer life and keeps on producing goods for many years. Therefore, the total cost of the plant including the interest cost on the debt taken to build the plant is not recognized as an expense in the profit & loss statement (P&L) in the year in which such costs are incurred. These costs are recognized as a cost in the P&L over the life of the plant as depreciation.

Investors should note that recognition of the cost of the plant including the interest cost of the debt taken to build the plant, has no relation to the cash outflow/timing of the cash to be paid by the company for the plant. The costs of the plant including the interest cost need to be paid when they become due: monthly for interest payment and as per terms with the seller for the machinery etc. Cash outflow has no relation to the recognition of cost. The bank would ask for interest payment every month irrespective of the fact that the company might expense this plant in P&L over 10 years.

Therefore, investors should estimate the total interest outgo that the company might need to make including the interest which is expensed in the P&L as well as the interest, which is capitalized and then calculate the interest coverage etc.

Profit from ordinary activities after finance costs but before exceptional items

Profit from ordinary activities before finance costs and exceptional items + Finance costs

Exceptional Items

Profit from ordinary activities before tax

Profit from ordinary activities after finance costs but before exceptional items + Exceptional Items

Tax Expenses

Current tax

Deferred tax

MAT Credit adjustments

Net Profit from ordinary activities after tax

Profit from ordinary activities before tax - Tax Expenses

  • Extraordinary Items (net of tax expense)
  • Net Profit for the period
  • Operating profit (EBITDA)
  • Paid up equity share capital
  • Reserves excluding business reconstruction reserves as per balance sheet of previous account payer
  • Earning per share before extra ordinary item
  • Earning per share after extra ordinary item
    • Basic EPS
    • Dilute EPS

Particulars of shareholding

  • Promoters & Promoters group shareholdings
    • Pledged/encumbered
    • Non Encumbered

Capital employed

The difference

Each type of financial statement provides financial decision makers with different types of information necessary to run the company. For example, the income statement details the company's revenues, gains, expenses and losses but does not include cash receipts or cash disbursements. Meanwhile, the balance sheet often includes what might be referred to as theoretical money such as money that is owed to the company but not yet collected, while the cash flow statement reports money actually received or paid.