What is an Income Statement and How Can Stock Investors Use It to Their Advantage?
There are three main financial statements that are important for investors to be familiar with. These include the balance sheet, cash flow statement and the income statement. The income statement is basically the statement that measures the financial performance of the company. It is assessed by taking factors including the revenue and expense into consideration. It will also give a measure of the profit and loss that was incurred by the company. They are usually created quarterly or annually. Some businesses refer to the statement as a profit and loss statement.
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What is an Income Statement?[/caption]An income statement has two main parts. These are known as the operating section and the non-operating section. Investors can usually get more from the operating section. This gives them information about the revenue and expenses that come from the regular business operation. The non-operating section will include information about the revenue and expenses that come from activities that are not directly related to the regular business operation.
Income statements can either be single-step or multi-step. A single-step statement basically shows the sales minus the cost of the materials and production. This results in the gross income. These are generally very easy to read and understand. Multi-step statements are a bit more involved. Multi-step income statements will include the following information:
Net Sales - the income a business brings in as a direct result of selling goods and services.
Cost of Sales - the expenses incurred for the materials used to create goods to be sold.
Gross Profit - the profit margin after that is calculated after all business expenses are covered.
SG&A (Selling, General & Administrative Expenses) - the expenses for operating the business.
Operating Income - the difference between the company's gross profit and the SG&A amount.
Interest Expense - the cost of interest paid out to investors of the company.
Pretax Income - the amount of income generated before any taxes are paid.
Income Taxes - the amount of tax that is paid by the company.
Net Income - the amount of money a business profits after everything is paid, also known as the bottom line.
These are all aspects of an income statement. When you take a look at an income statement for a business, you can determine the company's profitability. This is something that should be considered when you are determining whether or not you want to invest in a business. Choosing a business that is not very profitable to invest in is not a very wise investment move. You should not only look at the most recent statements, but you should also take a look at the previous income statements. This will allow you to see the trends for the business you are considering.
Investors that have a full understanding of an income statement can really have a big advantage in the investment world. Most wise investors take the time to analyze the components of the statements before they decide to invest. Businesses that have a good profit margin are generally wise investment options because they manage their business well.
If you would like to learn more about income statements, follow this link because it takes you to a video on how a small business is valued with an abbreviated income statement.
Also, if you're interested in learning more about using financial statements for investing, I highly recommend this Warren Buffett Book. The link takes you to Amazon where the book can be found. This book is a great read and it teaches the reader how to invest like Warren Buffett using financial statements.
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