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How to Analyse Income Statements
Income statement
Shows the profit or loss of a business. Shows the gross and operating margins as well
TTM (Trailing 12 month)
Net Income: The profit after expenses
SGA (Selling, general and administrative expenses), sum of all direct and indirect expenses and all general and administrative expenses of a company. (also includes marketing and paying employees salary etc)
Gross Profit = Total revenue - cost of revenue (cost of goods sold, COGS)
Gross Profit Margin (in %) = (Gross Profit / Gross/Total Revenue) * 100%
Operating income = Gross Profit - Operating Expenses
Operating income or loss. If number is -ve, it is reported as a loss and vice versa.
Operating Margin (In %) = (Operating Income/Total Revenue) * 100%
A good operating margin is ~15%. Higher the operating margin the better.
Interest Expense: Amount of interest that is paid (eg on bonds, loans, line of credit)
Total other income/expenses net: Other expenses/income that is not related to the core business
Income Before Tax: Company's Income after all incomes have been deducted, but before income tax has been subtracted
Income Taxes Paid (Income Tax Expense): Amount of taxes paid
Earnings Per Share (EPS) = Net Income/Number of outstanding shares
Date on breakdown refers to the year ending on that date
Top line, total revenue aka the top line
Bottom line, net income
Total Revenue
L.F. Positive and increasing value
Net Income
L.F. Increasing net income
High % of net earnings to total revenue
Gross Profit
L.F. Increasing gross profit, as the gross profit margin is higher
Gross Profit Margin
L.F. Companies with constantly higher gross profit margins. GPM of 40% or higher tends to have a durable competitive advantage
Operating Expenses
Avoid companies with high research costs, high SGA and high interest cost on debt
SGA in % [ (SGA Expenses/Gross Profit)]*100%
L.F. consistent SGA %, lower the better.
30% to 80% is an acceptable range, avoid close to or excess of 100%
Operating Income or loss
L.F. Positive and increasing value
Little or no interest expense
Should be <15% of operating expenses for consumer products category
In an industry, the company with the lowest ratio of interest payments to operating income is most likely to have a durable competitive advantage
EPS
L.F. consistent and upwards EPS trend
L.F. a lower depreciation cost as a % of gross profits (~10% or less is desirable)
Look for all of these conditions to be fulfilled. Increasing revenue may not be desirable if net income is decreasing. This suggests that their operating expenses might be increasing at a faster rate