What is a profit and loss statement, and why do investors need to understand it

If you are an investor, executive, or entrepreneur, you have probably heard the term “Profit and Loss Statement” or P&L. Since this is one of the most important indicators for assessing a business’s financial strength, this document not only shows whether the company/business is profitable or operating at a loss but also reveals the sources of income and the points where cash outflows are excessive. That is why executives and investors pay close attention to this document.

What does the P&L (Profit and Loss Statement) tell us?

Profit and Loss Statement or Profit and Loss Statement is a financial document that shows the results of a company’s operations over a specified period. It details three main components: total revenue, total expenses, and the final result, which is profit or loss.

The importance of the profit and loss statement lies in its ability to help management clearly understand how much money the business makes, where that money comes from, and where it goes. Additionally, it serves as a tool to develop business strategies to increase profitability over different periods.

Basic principles for calculating a profit and loss statement

Calculating a profit and loss statement is not as complicated as many think. The basic formula is:

Total Revenue – Total Expenses = Profit or Loss

(Main components 3 parts

• Total Revenue )Total Revenue( refers to the income received from sales of goods, services, or other income sources during the specified period.
• Total Expenses )Total Expenses( are all the costs the business must pay to operate, including raw materials, employee wages, rent, advertising, etc.
• Profit or Loss )Profit or Loss### is the difference between revenue and expenses. If revenue exceeds expenses, the result is a “profit”; if expenses are higher, it results in a “loss.”

Structure of detailed profit and loss statement

Once we understand the basic formula, the actual profit and loss statement is more complex and divided into several levels:

(Detailed calculation steps

( Meaning of each item

Sales and Service Revenue )Sale( is the main income generated from selling goods or providing services to customers.

Other Revenue )Other Revenue( includes income not from core operations, such as bank interest, dividends, or rental income.

Cost of Goods Sold )Cost of Goods Sold### covers all costs directly related to producing goods or services, such as raw materials, labor, and factory expenses.

Selling Expenses (Selling Expenses) are costs incurred to deliver products or services to consumers, such as advertising, marketing, transportation, and commissions.

Administrative Expenses (Administrative Expenses) are costs related to running the business, such as administrative staff salaries, office rent, telephone, and computer expenses.

Gross Profit (Gross Profit) indicates how much profit remains after selling goods/services and deducting production costs.

EBIT is the operating profit before considering financial expenses and taxes.

EBT shows profit after deducting financial expenses.

Net Income (Net Profit) is the final figure, indicating the actual profit remaining after all expenses, including taxes.

Example of actual calculation

Suppose a company has the following data:

• Sales Revenue: 1,000,000 THB
• Cost of Goods Sold: 600,000 THB
• Selling Expenses: 150,000 THB
• Administrative Expenses: 100,000 THB
• Financial Expenses: 20,000 THB
• Income Tax: 16,000 THB

The calculations would be:

• Gross Profit = 1,000,000 – 600,000 = 400,000 THB
• EBIT = 400,000 – 150,000 – 100,000 = 150,000 THB
• EBT = 150,000 – 20,000 = 130,000 THB
• Net Income = 130,000 – 16,000 = 114,000 THB

The two main formats of profit and loss statements

( 1. Report Form )Report Form(

This format arranges items from top to bottom, showing revenue -> expenses -> net profit/loss. Presentation style:

• Header with 3 lines: company name, “Profit and Loss Statement,” and period
• Revenue section with totals
• Expense section with totals
• The difference between total revenue and total expenses is the net profit or loss

Advantages: Easy to understand, clear overview, convenient for reading and analysis.

) 2. Account Form (Account Form)

This format arranges items in a T-shape, with expenses on the left and revenue on the right.

Advantages: High clarity, totals on both sides are equal, accepted by government agencies.

Why is the profit and loss statement important?

Measure profitability

The profit and loss statement helps management see how effectively the business converts revenue into profit.

( Operational progress

By comparing profit and loss statements over different periods, management can determine whether the business is growing or in decline.

) Sources of losses

If the business incurs a loss, this statement indicates where the problem lies—whether from low revenue or excessive expenses.

Investment decision-making

Investors use the profit and loss statement to evaluate whether the company should invest, based on its ability to generate profit.

( Future strategic planning

Data from this statement assists management in making better decisions to adapt, reduce costs, increase prices, or expand the business.

How to read a profit and loss statement correctly

) Step 1: Check the period

First, verify which period the statement covers—monthly, quarterly, or yearly. For example, if it states “for the year ending December 31, 2566,” it is an annual report.

Step 2: Look at the final result ###Profit or Loss@

Before delving into details, glance at the last number to see if the business is profitable or operating at a loss. If profitable, you are on the right track; if at a loss, identify the issues immediately.

Step 3: Study where the income comes from

Check whether the income is from core sales/services or other sources. The proportion of each indicates the business’s risk level.

Step 4: Analyze expenses in detail

Identify which areas the business spends the most, and whether any expenses are excessive or can be reduced.

Step 5: Calculate profit percentage

To find out what percentage of total revenue the net profit represents, compute: ###Net Profit / Total Revenue### × 100. This figure is called “Profit Margin” and indicates how efficient the business is.

( Step 6: Compare with previous periods

Compare this year’s profit and loss statement with last year’s, or this quarter with the previous quarter, to see if the company is growing or declining.

Summary

The profit and loss statement is a financial document that indicates the business’s profitability status by showing details of revenue, expenses, and net profit. Proper understanding and reading of this statement are essential skills for investors, management, and entrepreneurs.

However, investment decisions or business planning should not rely solely on the profit and loss statement. Other factors such as market conditions, management quality, growth opportunities, economic environment, and long-term vision should also be considered.