FFB-Post 18
The income statement is essentially the report card of a business, showing whether it’s making money or losing it. It’s a vital tool for any investor, revealing the financial performance of a company over a specific period.
Breakdown of the Income Statement:
- Revenue: All the money coming into the business.
- Gross Profit: This is calculated by subtracting the cost of goods or services sold from the revenue.
- Profit Before Tax: Subtract total expenses (like rent, salaries, and interest) from the gross profit.
- Net Profit: The profit left after paying taxes—also known as Profit After Tax (PAT).
A Simplified Example:
Let’s say we’re looking at the income statement of X Restaurant:
- Revenue: ₹50,000
- Cost of Goods Sold: ₹25,000
- Gross Profit: ₹25,000
Now, subtract the expenses:
- Rent: ₹7,000
- Salaries: ₹7,000
- Depreciation: ₹2,000
- Electricity Bills: ₹1,000
- Bank Interest: ₹2,000
- Total Expenses: ₹19,000
Profit Before Tax: ₹25,000 – ₹19,000 = ₹6,000
Taxes: ₹1,000
Net Profit: ₹6,000 – ₹1,000 = ₹5,000
Key Takeaways:
- Consistent Growth: Look for companies with steadily increasing profits year over year.
- Return on Equity (ROE): This measures how much profit a company makes as a percentage of its equity. I consider a business with a consistent ROE of 15% or more to be excellent.
Recap of Our Checklist:
- Is the book value growing?
- Debt-to-equity ratio under 50%?
- Consistent profit growth?
- ROE of 15% or higher?
With these four points in mind, you’re well on your way to evaluating a company’s financial health. Stay tuned as we continue to build this checklist in the following posts.
In the next post, we’ll dive into the Cash Flow Statement and its importance in understanding a business’s liquidity.
This series is designed to help you become a more informed and confident investor, so keep following for more insights!
For Post 19 – Click Here -> Cash Flow Statement: A Deep Dive