Elements of a profit and loss analysis of a company
The profit and loss statement or income statement is often the first financial statement looked at when analyzing a company. It also contains the numbers most often discussed about a company such as revenue, earnings and earnings per share. Basically, the profit and loss statement shows how much money the company generated (revenue), how much it spent (expenses) and the difference between the two (profit) over a certain time period. The profit and loss statement lets investors know, whether or not the company is making money. Companies need to bring in more money than they spend or they will be out of business before long. Low expenses relative to revenue or high profits relative to revenue indicate a company is doing well. There are three elements the profit and loss analysis of a company will focus on:
A profit loss statement provides important insights into each of these elements.
Profit and loss analysis of a company and what the elements mean
- Revenue (sales) – The most straightforward part of the P&L statement. Often revenue is just a single number that represents all the money a company brought in during a specific time period.
- Expenses – There are many different expenses but the two most common are:
- Cost of goods sold (COGS) – The expense most directly involved in creating revenue. It represents the costs of producing or purchasing the goods or services sold by the company
- Selling, general and administrative expenses (SG&A) – Costs involved in operating the business. Includes marketing, salaries, utility bills, technology expenses and other general costs. SG&A also includes depreciation and amortization.
- Profits – There are several profit subcategories used that tell how the company is doing:
- Gross profit – Calculated as revenue minus cost of sales. Companies with high gross margins will have a lot of money left over to spend on other business operations.
- Operating profit – Revenues minus the cost of sales and SG&A. This represents the profit a company made from its actual operations, and omits certain expenses and revenues that may not be related to its central operations.
- Net income – A company’s profit after all expenses have been paid. A company with a high profit margin usually indicates that it has one or more advantages over its competition.
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