Turning Revenue into Profit: Income Statements

Understanding how a company makes money and what you get as a shareholder is crucial. Here's what an Income Statement holds. Add me on Instagram/Twitter: @MrArturNagy

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WHAT IS AN INCOME STATEMENT AND HOW TO READ AN INCOME STATEMENT
1. An Income Statement lets you see how much revenue a company is generating and what are the associated costs of turning that revenue into net profit. Items like cost of goods sold, operating expenses (rent, utilities, fuel, wages, etc.), taxes, and interest is deducted from the revenue to determine how much profit is left over, which can be later issued as a dividend or left in the company as retained earnings.
2. If you look through the statement item-by-item, you will see how money is generated and spent, which is very important when checking how efficiency has changed over the years (how much of the money goes to costs) or when you want to compare the company to a competitor to see who's more efficient.
3. Take a look at the revenue, gross profit, and net income numbers to see how the company has been growing or declining, and look for any trends or outliers. You can look through the lines to see what caused an outlier result.
4. Lower in the income statement you will see EPS, or Earnings Per Share, which shows you how much money the company earns for each share (not so surprisingly). So if you have 1 full share, that's how much your share made (also true if you have 500 shares, just multiply the EPS number). EPS is used in some metrics, and you can compare it dividends as dividend amounts (dollars) are given per share.
5. And the last thing is the Number of Outstanding Shares that shows you the number of shares in circulation that you can buy and sell. This number might change based on whether the company is buying back shares (decreasing number of shares, we like to see that) or issuing new shares (increasing number of shares, we don't like that. Perhaps the only exception is when the company is super overpriced so new buyers are paying good money to the company for the new shares and the company can use the extra money to expand. Generally issuing new shares are not good as it dilutes your position.)

Some Income Statements might look different and have different lines based on industry or the stock market the company is listed on.

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*The content in this video is accurate as of the posting date. This is not investment advice. I am not a financial advisor.

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