Study the Income Statement Before Investing In Stocks!
The income statement is a financial report that will inform the investor of a company’s revenue and expenses. This financial statement, along with the balance sheet and statement of cash flows, should be studied before purchasing a company’s stock. An investor should know whether the company they are interested in is showing a profit!
This financial statement is conveniently provided for you on financial websites, such as Yahoo Finance, under the Financials tab. Here you will find a comparison of four years of a company’s Income Statements. Make sure the Net Income is positive and preferably growing from year to year. You want the company you are interested in 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. The income statement is usually prepared for a specified period. This statement will also show you the company’s gains and losses!
The first line item to appear on the income statement is revenue. This is the amount of money that a company really receives. It is the company’s total sales. Revenue is usually reported in the period when sales or services are made.
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. Examples of “non-operating” 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 before purchasing its’ stock! Without profit, a company would be unable to pay dividends, repurchase its’ shares or even reinvest in its business in order to grow. The income statement matters to investors!