In a company’s income statement, you’ll be able to see how company’s performance over a period of time. Typically, the top-most figure is the gross revenue (GR) that the company has generated.
Next, you should see the company’s operating expenses. These are the Selling, General and Administration (SGA) expenses, the Research and Development (R&D) expenses, and Depreciation.
Deducting the operating expenses from the GR will give us the next figure, which is the Operating Profit or Loss of the company. A company that has a very high GR is not necessarily a good thing, because if they have very high expenses, then there’s nothing or very little left for the company’s shareholders.
Theoretically, the higher the profit margins of a company, the better an investment it’ll make.
The next part of the income statement is the Interest Expense, Gains or Losses from sale of assets and Others. Deducting all these figures will give us the income of the company, before tax.
Interest Expense is a point of importance on a company’s income statement because it shows us the financial health of a company. Borrowings is what is known as leverage. Ideally, we want to make sure that the company is not too heavy in debt, and not paying too much for the interest on its leveraged assets. It is very common and in fact, almost a standard that companies are leveraged, but having too high an interest is dangerous, especially during a financial crisis (where business may dry up, and interest may rise, simultaneously).
The next part of the Income Statement would show the taxes paid by the company. Deducting this figure will show us the net earnings of the company.
Category: Fundamental Analysis (FA)