Study the Income Statement Before Investing
What Is An Income Statement?
The income statement is an essential financial report that will inform the investor of a company’s revenues and expenses. This financial statement, is one of the three primary statements that should be studied before purchasing stock in a company. (The other two statements are the balance sheet and the statement of cash flows). An investor should know whether the company they are interested in buying is showing a profit!
The Income Statement is also referred to as a profit and loss statement. The profit or loss is determined by taking all revenues and subtracting all expenses. This statement will show you the company’s gains and losses! The income statement is usually prepared for a specified period either quarterly or annually.
This financial statement is conveniently provided for you on financial websites. The income statement can be found under the “Financials” heading on Yahoo Finance. Here you will find a comparison of four years of a company’s Income Statements. Make sure the Revenue has been increasing from year to year. In addition, the Net Income should be positive and growing. You want the company you are interested in buying shares in to show a profit!
What Are The Components Of An Income Statement?
The first line item to appear on the income statement is revenue. This is the amount of money that a company receives from the sales of goods and services. It is the company’s total sales. Revenue is usually reported in the period when sales or services are made. You want to compare the company’s revenue to the prior years to make sure it is increasing!
Cost of goods sold is then subtracted from revenue to obtain the company’s gross profit. Cost of goods sold is the total of all the costs used to create a product or service that the company has sold. Some examples of the cost of goods sold would be labor, materials or overhead.
The company’s “operating” expenses, such as selling and general expenses, are then deducted from gross profit. Some examples of selling expenses would be salaries, advertising, depreciation, and miscellaneous expenses.
In addition, “non-operating” expenses are deducted. Some examples of these expenses would be office supplies, interest charges, income taxes, and miscellaneous general expenses.
Earnings before tax are then reported and the appropriate taxes deducted to derive at the company’s net income or loss. Net income is the profit a company earns after all expenses and deductions. It is also known as the company’s bottom line. Net income is important to investors!
In conclusion, it is important to study a company’s income statement before purchasing its’ stock! An investor needs to know if the company is making a profit (or, a loss) before purchasing its’ stock! Without profit, a company would be unable to pay dividends, repurchase its’ shares, or reinvest in its business. In addition, it is important that the company’s revenue is growing! Hence, the income statement is essential to investors!
