Understanding Profit and Loss Statement - A Key Tool for Analyzing Business Performance

What is a (Profit & Loss (P&L)) Statement and Why Is It Important for Investors

For investors and management, reading and understanding the (Profit and Loss Statement or P&L) is an essential basic skill. This document reveals the illusion of the actual operational performance of a business during a specified period.

The Profit & Loss Statement is a financial document that summarizes three main pieces of information: total revenue, expenses over the period, and the final result indicating whether the business made a profit or incurred a loss. This document does not merely indicate “the business makes money or not,” but also provides detailed insights into the sources of income and where the business spends money.

Additionally, the P&L supports management in strategic planning for the future by identifying which expenses can be reduced and which areas of operations should be expanded.

Basic Formula and Profit Calculation

The calculation principle of the profit and loss statement is very straightforward:

Total Revenue − Total Expenses = Profit (or Loss)

• Total Revenue (Total Revenue): Cash and other valued items received from selling goods or services
• Total Expenses (Total Expenses): Cash and other items spent by the business for general operations, such as salaries, rent, advertising, etc.
• Profit or Loss: The difference between revenue and expenses

Detailed Breakdown of Revenue and Expenses

When studying the profit and loss statement, you’ll find that the data is divided into multiple layers, each telling a different story about the company’s status.

Revenue Section

• Core Operating Revenue (Core Operating Revenue): From the sale of the main goods or services of the business
• Other Revenue (Other Revenue): Such as bank interest, dividends, rental income from assets, etc.

Expense Section

• Cost of Goods Sold / Services (Cost of Goods Sold - COGS): Raw materials, labor, and all costs related to producing goods or services
• Selling Expenses (Selling Expenses): Advertising, marketing, transportation, commissions, etc.
• Administrative Expenses (Administrative Expenses): Salaries of management, office rent, training costs, etc.
• Financial Expenses (Financial Expenses): Including interest expense, which is part of financial costs arising from interest paid on loans or debts. For example, if a business borrows money from a bank to expand, the interest paid each period appears as interest expense in the P&L.

Various Profit Levels

On the way from revenue to the final profit, there are several intermediate points, each providing different information:

1. Gross Profit (Gross Profit) = Revenue − Cost of Goods/Services Indicates how much the business can mark up the price over the cost.

2. Operating Profit (Operating Profit) = Gross Profit − Selling and Administrative Expenses Shows the overall profit from core operations.

3. Earnings Before Tax (EBT) = Operating Profit − Financial Expenses Here, all financial costs, including interest expense, are deducted.

4. Net Income (Net Income) = EBT − Income Tax This is the final result remaining for shareholders.

Presentation Formats of the Profit & Loss Statement

Organizations can choose to present the P&L in two ways, depending on purpose and policy:

( 1. Report Format )Report Form### Order of presentation: Revenue → Expenses → Final Profit (or Loss) Focuses on simplicity and is suitable for presentation to stakeholders and senior management.

Advantages: Clear sequence, easy to read, provides a quick overview of operational performance.

( 2. Account Format )Account Form### Uses T-accounts with expenses on the left and revenue on the right, with totals on both sides equal.

Advantages: Clear categorization, widely accepted by regulatory agencies.

How to Read and Analyze the Profit & Loss Statement

( Step 1: Check the Period First, ensure you are reviewing data for the correct period )monthly, quarterly, or yearly###, as this affects interpretation.

( Step 2: Check for Profit or Loss Compare total revenue with total expenses:

• Revenue > Expenses = Profit
• Revenue < Expenses = Loss

) Step 3: Analyze Revenue Sources Identify which business functions generate most revenue and how dependent the business is on those sources.

Step 4: Examine Expense Types

Analyze which expenses are the largest proportion and whether they can be reduced, such as high interest expenses indicating excessive debt.

Importance of the Profit & Loss Statement for Business Analysis

Profitability Assessment: The P&L reveals how effectively the business converts revenue into profit and its overall efficiency.

Investment Decision-Making: Investors rely on P&L data to decide whether to invest and estimate potential profits.

Management Planning: Management uses this information to improve efficiency, reduce costs, and increase revenue.

Performance Comparison: Enables comparison of different periods or against industry competitors.

Financial Health Indicator: Can signal financial risks, such as high interest expenses indicating significant debt.

Cautions When Analyzing

Although the P&L is a powerful tool, decisions should not rely solely on it. Multiple factors should be considered:

• Business Characteristics: Growth trends or sensitivity
• Management Team: Experience and capability
• Competitive Environment: Industry position
• External Factors: Economic events, legal changes, or social conditions

Summary

The ###Profit and Loss Statement### is one of the three main financial statements that help investors, management, and stakeholders systematically and deeply understand the financial status and performance of a business. Proper reading of the P&L enables more informed business and investment decisions.

Knowledge of financial analysis like this can also be applied to case studies involving digital assets and investments in other financial markets.