CHAPTER - 5
Understanding the P&L statement
A profit & loss account is the statement that gives the figure of profit earned or loss suffered by a company,also known as a statement of Profit or loss, income statement, statement of operations. In addition, the profit & loss account provides information regarding revenues generated & expenditures incurred for a particular period.
Let's understand the Profit & loss account or P&L account in brief:
1. Revenue (Top line of the company): The top line is the word used by the analysts, which is nothing but the revenue side of the p&l account. Topline means the sales figure of the company.
A sum of sale of products, services, and other operating income gives you the total operating profit figure.
Revenue also includes income from other sources, but the main focus of analysts is operating Profit as it indicates how good the business is doing.
2. Expenses: Expenses mean money spent by the company to generate revenue. The expenses of the company are based on the nature of the business. For example, a company in the business of services will not have the cost of goods sold. A company's significant expenses involve the cost of goods sold, marketing & advertising, selling & administration expenses, salaries & wages, interest, taxes, professional fees, etc.
3. Profit before interest & tax: Profit before tax is operating income after deducting operating expenses but before tax & interest.
4. Profit after tax- Profit before tax – tax expenses.
The investor should concentrate on the top line of the company & the bottom line (net Profit). If the top line & bottom line shows an increasing trend on year on year basis, i.e., when compared to previous years, it might be a good company to invest in.