Beginner3 min readFundamental Analysis and Financial Statements · 4/15
How to Read the Income Statement
The income statement starts at the top with everything the company sold, then works down line by line subtracting costs, until it reaches net profit at the bottom.
What you will learn
Read the income statement top to bottom and understand each line.
See why large revenue does not mean large profit.
Compare two years the right way.
The lesson as a short video · 24 seconds · Watch on YouTubeIn this lesson
This is a simplified income statement for an invented company, Al Wadi Foods, for a full year. Figures in brackets are costs being subtracted. Real statements have more lines, but the order is the same.
Income statement (EGP m)
Revenue (sales)1,000
Cost of sales(600)
Gross profit400
Selling and admin expenses(250)
Operating profit150
Finance costs (interest)(30)
Profit before tax120
Tax(27)
Net profit93
From 1,000 million in sales to 93 million in net profit.
Line by line
RevenueThe value of what the company sold during the period. The first line, often called the top line.
Cost of salesThe direct cost of what was sold: materials, production and the like.
Selling and admin expensesSalaries, rent, marketing and running the company itself.
Finance costsThe interest the company pays on its loans.
Net profitWhat is left for shareholders after everything. The last line, the bottom line.
In the example the company sold 1,000 million, but only 93 million was left as net profit. Of every EGP 100 of sales, about EGP 9.30 remained as profit. Large revenue alone says nothing about profit.
Compare two years
ExampleLast year revenue was 800 million and net profit 80 million. This year 1,000 and 93. Revenue grew 200 ÷ 800 = 25%, net profit grew 13 ÷ 80 = 16.25%. Profit rose, but more slowly than sales. The natural next question: why did costs rise faster?
Real statements place this year's column next to last year's, so the comparison is ready for you. When a figure changes sharply, the notes usually explain why.
Watch outSometimes net profit is inflated by a one-off gain, such as selling land or a building. It is real, but it will not repeat every year. Look for it in lines like "other income" and in the notes before comparing years.
Read a real income statement
Open any company's statements from the disclosure archive and walk the income statement from the first line to the last.