Income Statement Explained
Without audited financial statements, how can investors know the health of their investment? The income statement is an integral document detailing how a company earned its income. Furthermore, it reveals strengths and weaknesses of each company.
The income statement details a company’s financial performance over a given period. This is an accounting practice required by all public companies. Additionally, a uniform method of completion makes it easier for investors to analyze the document.
Furthermore, the income statement gives insight into how a company earns money through operating and non-operating activities. Analysts and accounts value these statement because it is the only one that reveals sales figures. Without sales, a company can’t survive for long.
Navigating the Income Statement
Additionally, this document shows how sales produce income. It is broken down into two parts- operating and non-operating activities. Consider operating activities as core business practice by the business, such as the cost of goods sold. In fact, subtracting revenue from the cost of goods sold yield gross profit, and dividing these two yields gross margin. This information alone gives investors valuable data. It reveals how efficiently the company produces goods.
Conversely, the non-operating portion details expenses tied to non-core business activities. These include administrative expenses that every business incurs, or if the company sells real estate in a deal (assuming the company is not in the business of selling real estate).
Importance of the Income Statement
This statement is the starting point for a myriad of metrics that analysts and investors alike use to value companies. Metrics such as return-on-equity (ROE) and return-on-assets (ROA) are not possible without numbers from the income statement. EBITDA is extremely important to investors, as it is a quick way to judge the company’s income removing noncash expenses. Additionally, many statements show several quarters or years of performance for ease of comparison.
The income statement reveals sales figures, which tells the true story of a business’ success. It is the root of many other metrics and valued by investors and analysts all over the world.