Financial literacy and accountingModule 3, lesson 8 of 19
The income statement
How to read a company's income statement, also called the statement of profit and loss, line by line from revenue down to net profit and earnings per share.
In this lesson
- Name the main lines of an income statement and what each one records.
- Work out gross profit, operating profit and net profit from a real-style statement.
- Tell standalone results from consolidated results.
- Know when Indian listed companies publish their results.
- Read an income statement for trends and one-off items rather than a single number.
Builds on
- Revenue, expenses and profitThe income statement is a formal version of revenue minus expenses at different levels of profit.
- Profit compared with cash flowThe income statement is prepared on an accrual basis, so its profit is not the same as cash.
On this page
In simple terms
The income statement is a company's report card for a period of time, usually a quarter or a financial year. It answers one question: did the business earn more than it spent, and by how much?
In Indian annual reports it is usually titled the Statement of Profit and Loss, and people also call it the P&L. Whatever the name, it starts with what the company earned at the top and works down, subtracting costs, until it reaches the profit that belongs to shareholders at the bottom.
The lines, from top to bottom
Most Indian listed companies present their income statement with lines in roughly this order.
| Line | What it records |
|---|---|
| Revenue from operations | Sales of the company's goods and services: its main business |
| Other income | Interest, dividends and gains from things outside the main business |
| Total income | The two added together |
| Cost of materials and goods | Raw materials used and goods bought for resale, adjusted for changes in stock |
| Employee benefits expense | Salaries, wages and staff benefits |
| Finance costs | Interest on borrowings |
| Depreciation and amortisation | The cost of long-lived assets spread over their useful lives |
| Other expenses | Everything else: power, rent, marketing, freight and so on |
| Profit before exceptional items and tax | What the regular business earned before tax |
| Exceptional items | Unusual one-off gains or losses |
| Profit before tax | Profit after exceptional items |
| Tax expense | Current tax and deferred tax |
| Net profit (profit for the period) | What belongs to shareholders |
| Earnings per share | Net profit divided by the number of shares |
Notice what is missing: the statement usually does not print "gross profit" or "operating profit" as separate lines. You calculate them yourself, as the worked example shows.
Worked example
Worked example: Reading a made-up statement
Here is a simplified year for a made-up manufacturer, Kaveri Pumps Ltd (₹ crore).
| Revenue from operations | 1,200 |
|---|---|
| Other income | 20 |
| Cost of materials | −660 |
| Employee benefits | −150 |
| Other expenses | −170 |
| Depreciation and amortisation | −50 |
| Finance costs | −30 |
| Profit before exceptional items and tax | 160 |
| Exceptional item: gain on selling land | 40 |
| Profit before tax | 200 |
| Tax | −50 |
| Net profit | 150 |
Now calculate the levels the statement does not print:
| Gross profit: 1,200 − 660 | 540 |
|---|---|
| Operating profit (EBIT): 1,200 − 660 − 150 − 170 − 50 | 170 |
| EBITDA: operating profit + depreciation | 220 |
Operating profit (₹170 crore) excludes other income, interest, the land sale and tax, so it shows how the pump business itself performed. Net profit of ₹150 crore looks healthy, but ₹40 crore of the profit before tax came from selling land, which will not happen every year.
EBITDA stands for earnings before interest, tax, depreciation and amortisation. It is widely quoted because it gives a rough view of cash earnings from operations, but it leaves out real costs, so treat it with care. Operating profit and net profit goes deeper.
Standalone and consolidated
Many Indian companies own subsidiaries. They therefore publish two sets of results:
- Standalone results cover the parent company alone.
- Consolidated results combine the parent with its subsidiaries, as if they were one business.
For a company with important subsidiaries, consolidated results usually give the truer picture. The key is to compare consolidated with consolidated, and standalone with standalone, across years and between companies.
When results are published
Listed companies publish their financial results every quarter, within deadlines set by SEBI, and the results for the full financial year are audited. Results are filed with the stock exchanges, so you can find them on the NSE and BSE websites as well as on the company's own website.
Why it matters
The income statement is where you see whether a business is actually profitable, whether that profit is growing, and where the money goes. Almost every valuation measure, such as earnings per share and the price-to-earnings ratio, starts from a line in this statement.
Reading it properly also protects you from headlines. "Profit jumps 50%" might come from a one-off sale, from lower tax, or from a genuinely better business. The statement tells you which.
How to read it well
- Compare several years, ideally five, not one quarter in isolation.
- Watch the margins, not just the rupee amounts. Is each ₹100 of revenue producing more or less profit than before?
- Separate the regular from the unusual. Look at profit before exceptional items, and check the notes for anything else that is one-off.
- Check where other income comes from. A company whose profit depends on interest from its cash pile is different from one earning it from operations.
Limitations
The income statement uses accrual accounting, so profit is recorded when it is earned, not when cash arrives. A company can show rising profits while running short of cash; you need the cash flow statement to check. The statement also involves judgement, for example in how fast assets are depreciated, and it tells you nothing about what the company owns or owes. That is the job of the balance sheet.
Common mistakes
- Reading only net profit. One number hides where the profit came from.
- Ignoring exceptional items and other income. They can flatter or depress profit without saying anything about the core business.
- Mixing standalone and consolidated figures when comparing years or companies.
- Judging a seasonal business by one quarter. Some businesses earn most of their profit in particular quarters; compare with the same quarter of the previous year.
Try it yourself
Find the latest annual report of any listed company you know (on its website's "Investors" page, or on the NSE or BSE website). Open the consolidated statement of profit and loss and:
- Write down revenue from operations and net profit for the last two years.
- Calculate net profit as a percentage of revenue for each year.
- Check whether there are any exceptional items, and how large they are compared with profit.
- Note how much of the profit before tax came from other income.
Key takeaways
- The income statement shows what a company earned and spent over a period, such as a quarter or a year, and the profit left at the end.
- It runs from revenue at the top to net profit and earnings per share at the bottom; each step down removes a different kind of cost.
- Indian statements do not always print gross or operating profit, so you often need to calculate them yourself.
- Consolidated results include subsidiaries; standalone results cover the parent company only. Compare like with like.
- Read several years side by side and look for one-off items, rather than judging a single period.
Check your understanding
Try the numbers yourself
- P/E ratio calculatorHow do I calculate a company's P/E ratio?
Finished reading?
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Terms used in this lesson
- Income statement
- The financial statement showing a company's revenue, expenses and profit over a period such as a quarter or a year.
- Revenue
- The money a business earns from selling its goods or services in a period, before any costs are deducted.
- Net profit
- What is left of revenue after every expense, including interest and tax. It belongs to the shareholders.
- EBITDA
- Earnings before interest, tax, depreciation and amortisation, a rough measure of the profit from a company's operations.
- Consolidated results
- Financial statements that combine a parent company with its subsidiaries as one business, unlike standalone results for the parent alone.
References
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (as published, with amendment notes), Securities and Exchange Board of India. SEBI's listing regulations, which require listed companies to publish quarterly and annual results.
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This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.