Profit and Loss Statement Investors Need to Know: How to Read and Analyze Correctly

Why Should You Care About the Profit and Loss Statement

In the investment world, if you don’t know how to read a P&L Statement, you’re missing out on important information because this document is at the heart of deciding whether to invest in a company or not.

Profit and Loss Statement (P&L) or called the income statement records a business’s operations over a period of time, summarizing how much money the business received, how much it spent, and what profit (or loss) remains in the end.

For executives and investors, understanding the profit and loss statement is a crucial tool to:

• Assess how well the business generates profit
• Check if costs are rising or falling
• Plan future business strategies
• Forecast next year’s revenue

Basic Formula of the Profit and Loss Statement, Easier Than You Think

To summarize the profit and loss statement into the simplest formula, it is:

Total Revenue - Total Expenses = Profit or Loss

• Total Revenue (Total Revenue): The total money received from sales of goods, services, or other sources
• Total Expenses (Total Expenses): The total money spent on running the business, from production costs to advertising
• Profit or Loss: The difference between the two figures

If revenue exceeds expenses = profit
If revenue is less than expenses = loss

More Detailed Structure of the Profit and Loss Statement

In deep analysis, the profit and loss statement is divided into several levels of profit, each indicating different aspects:

First Level: Gross Profit (Gross Profit)
= Sales Revenue - Cost of Goods Sold

This indicator shows how much profit remains after deducting production costs. The higher, the better.

Second Level: Operating Profit (Operating Profit)
= Gross Profit - Operating Expenses (such as rent, salaries, advertising)

This shows how well daily business management generates profit.

Third Level: Earnings Before Tax (EBT)
= Operating Profit - Financial Expenses (such as interest on loans)

Final Level: Net Income (Net Income)
= Earnings Before Tax - Taxes

This is the most important figure, indicating how much profit the business truly made after all deductions.

How to Properly Read a Profit and Loss Statement

1. Check the period first

The profit and loss statement can be monthly, quarterly, or yearly. Knowing the period is crucial for interpreting the data. For example, a 2022 annual report (from January 1 to December 31) shows data for the entire year.

2. See where the revenue comes from

Revenue doesn’t come from a single source. Companies often earn money from multiple sources:

• Interest received from customers
• Service fees
• Investment income
• Gains from currency exchange

Understanding the sources of income helps identify which parts of the business are most profitable.

3. Examine expenses in detail

Expenses are categorized into several types:

• Production costs: raw materials, labor
• Operating expenses: salaries, rent, tools
• Selling expenses: advertising, marketing, shipping

Knowing which expense category is the highest is vital for management.

4. Compare year over year

A single number may not tell much, but comparing with the previous year reveals trends:

• Is revenue increasing or decreasing?
• Are expenses better controlled or not?
• Is net profit expanding or contracting?

The Profit and Loss Statement Comes in Two Formats, Choose What You Understand

Report Format (Report Form)

Organized in a narrative order: Revenue → Expenses → Net Profit