Know About The Profit And Loss Statement Of The Company | Income Statement Template Format

When an investor starts his or her trading journey, while analyzing the financials of a company they come across a term profit and loss statement. Let’s see if it tells us only about the profit and loss or is there anything else that we can deduce from this statement which is released by the company.

What is a profit and loss statement ?

A profit and loss statement is a financial statement that tells us about the revenues, cost, and expenses that occurred during that specific period. It is one of the three statements that a company releases quarterly and annually along with balance sheet and cash flow. We can use these statements to see through a company’s performance (financially). It can tell you if the company is profitable or not.

The P/L statement provide information on the following:

• Revenue(total sales)
• Expense
• Operating profit and margin
• Depreciation
• Other income
• Taxes
• Net profit.

Let’s dive down into each of them and see what they actually tell us.

Revenue

This is the first set of numbers that a company presents in its P/L statement. It represents the total amount of sales made by the company during the year or a quarter. A point to keep in mind is that it is not profit, just the total amount of sales.

A thumb rule would be the lower your revenue the lower expenditure need to stay profitable

Operating profits

This section of the P/L statement gives us access to many sub items including direct costs which is the cost a company incur when they sell their product or deliver their services. It also includes gross margin which tells us the leftover money a company has after incurring their expenses like selling products or services. (Gross margin= revenue – direct cost).

Operating income and operating expenses are also covered in this section of the statement

It is important to remember that you only deduct those expenses that were used for the company’s operations only and do not cover any other expenses that might have incurred. For example we should only deduct expenses which are incurred in providing the services or product and shall not include the expenses done in its marketing.

Interest expense

Sometimes the company needs loans to carry out its operations, the loan can be from an nbfc or a bank but being a loan the company needs to repay it (if it doesn’t; do not invest in the company as the management would be very shrewd and its not good for the company in the long run) so all the expenses incurred in paying out the loan will be covered in this section.

If a company has no debts, this section would be 0. A general thumb rule would be higher the debts = higher the expense in interest.

Depreciation

whenever we own a tangible asset or a liability then it is also liable to depreciation. Which in simple terms means that when you own any assets (like equipment, heavy machinery, vehicles, etc) over time they lose their values; this is known as depreciation. Technically it is a non cash expense but must be factored under notional expense.

Simply put it is an expense that a company does not make but rather the depreciating value of the assets which is factored or included in the P/L statement.

Other income

Let’s suppose we are talking about a product manufacturing company, its main source of income is coming through the profits after selling its product in the consumer market. But let’s suppose it holds other assets like a small piece of land or has lent some money to either a company or an individual.

The company will gain some profit as rent or interest on the above mentioned asset; thos profit belongs to the company but as it is not coming from its core operation of selling the products it will be listed under a section known as other income.

Remember this profit earned will still be a PBT (profit before tax) as the company has not paid taxes on this amount. What you as an investor need to know is that this section which looks good for the company can actually prove to be a bad sign if it exceeds the profits earned by the company from its core business.

You should know that a fundamentally strong company is the one that earns a major chunk of its profit from its core business rather than other income. If you ever come across a company whose profit from operation is negative but other profits are there then it is a major red flag and leave that company.

Tax

Any taxes that a company pays or needs to pay comes under this section.

This is usually the last section of the statement.it is important to factor in the taxes paid by the company as it can give us the insights of the management of the company, if there is something sketchy in this segment you should proceed carefully.

Format of Profit and Loss Statement

For companies

As per Schedule III of the Companies Act, 2013, businesses must submit a profit and loss statement.

To put it another way, firms must follow the format outlined in Schedule III of the Companies Act of 2013, and must do so in a timely manner.

Profit and Loss (P&L) Statement Template Screenshot, Credits:- https://corporatefinanceinstitute.com/

For Sole traders and partnership firms

The format of income statement for traders and partnership enterprises isn’t set.

Traders and partnership enterprises often create profit and loss statements in a “T-shaped” format with two sides – debit and credit.

Conclusion

It is very important to know how a company that you are interested in performs on a financial level. One of the methods to analyze it is by going through the profit and loss statement; you will get a clear view of the company’s finances by going through the statement top to bottom, reading details hidden in the lines.

Assessing the operating profit margins which gives an inside understanding of the working efficiency of the company. It’s a good sign if this is increasing as it indicates geat operational efficiency of the company.

Analyze if the company is repaying its debts on time also have a basic knowledge of the sector that your company lies in and check whether it is generating revenue and profits from its core business or is it from other income (usually a bad sign when other income is greater than profit from core business)

Keep these points in mind and remember that you will make mistakes a few times while analyzing these companies initially but those mistakes are what makes you a seasoned investor.