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.
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
(To learn more about sales, read Measuring Company Efficiency, Inventory Valuation For Investors: FIFO And LIFOand Great Expectations: Forecasting Sales Growth.)
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.
Operation Profit = Income from Operations - expenses
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 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 before finance costs and exceptional items + Finance costs
Profit from ordinary activities after finance costs but before exceptional items + Exceptional Items
Profit from ordinary activities before tax - Tax Expenses
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.