আয়-ব্যয়ের হিসাব The income statement

An income statement answers a simple question: how much came in over the year, how much went out, and what was left? But it does not say it in one line. It descends from the top, subtracting one kind of cost at each step, and each step's result answers a different question.

This lesson walks down that staircase. By the end you will know why a company's profit can fall while its revenue rises, and why the margin says more than the absolute number.

The staircase

A question hides at each step. Revenue less the cost of goods sold gives gross profit, which says how much was left from making and selling the product. Then operating expenses come off, giving operating profit, which says how much was left from running the whole business. Then interest, then tax.

The gross margin

Gross profit divided by revenue, as a percentage. This number says how much pricing power the company has, and it is where the question from the lesson on complements and substitutes becomes a figure.

A pharmaceutical company might have a gross margin of 45% and a steel trader 8%. That is not one good and one bad company, it is two different businesses. So the comparison is always inside a sector.

Operating profit, the real measure of the business

Operating profit is the single most useful line, because it separates the business from the way it is financed. Two similar companies, one running on debt and one on its own money, will have different net profits and comparable operating profits.

Which is why comparing peers works better on operating margins: it asks how good the business is rather than how the financing decision went.

Interest, tax, and what remains

Interest comes off operating profit. The line looks small until debt is large, and then it eats a substantial part of the profit. When interest rates rise, this line is the first to grow.

Then tax, and what is left is net profit. Divide it by the number of shares and you have earnings per share, the number underneath the PE.

Where the numbers mislead

Three traps, all of them common.

One-off income. A company sells land for 500 million and it lands in net profit. This year's EPS looks superb and it will not repeat. So one-off items have to be looked at separately, and they usually sit in the notes.

Revenue up, profit down. This happens when a company is selling more at lower prices, or when costs are rising faster. Growing sales is good news if the margin holds, and otherwise it is only activity.

A rising share count. Bonus shares or a new issue raise the number of shares, so the same profit gives a lower EPS. Reading the EPS trend requires reading the share count too.