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Analyzing an Income Statement

This is a very important step in looking at a company.  Why?  If they aren’t making any money what is the point of buying the stock?   You might try to buy a company for the assets but the is for the elite league of investors.   Most don’t have the resources to buy a company for land (or whatever) and it usually doesn’t turn out well for the shareholder.   Most companies sell assets in duress, i.e., at a much lower price than the worth.  

Analyzing an income statement for a stock company involves examining various financial metrics and ratios to gain insights into the company’s financial performance and profitability.  In stock analysis, it is important to compare it to the industry and the overall market.  This is why it is time-consuming but important.  Industry analysis is out there on several sites.

Here’s a step-by-step guide on how to analyze an income statement:

Obtain the income statement: Get the company’s latest income statement, which can typically be found in its quarterly or annual financial reports or filings.  Usually, you can find this on the company’s website.   There are also several sites that provide this, but they try to normalize the data.  SEC Edgar website is a great place to get the actual information.

                Places to get income statements-

  1. The company’s Investor Relations website
  2. SEC Edgar website
  3. Other financial websites out there like Yahoo Finance, Google Finance,, MarketWatch,  CNBC, and others.  

In reviewing the income statement:  You are looking for the strength of the items of the income statement. In most cases, it involves revenue, cost of goods sold (COGS), gross profit, operating expenses, operating income, non-operating income/expenses, taxes, net income, and earnings per share (EPS).

1. Assess revenue trends:

Review the revenue section to determine the company’s top-line growth.  What is the top line?  It is revenue… Compare the revenue figures over multiple periods (quarterly or annually) to identify any growth or decline trends. Look for consistent revenue growth or even stable, as it indicates a healthy business.  Certain companies won’t have revenue growth like energy utilities that have a steady set revenue base (you pay your electric bill regardless) unless the price of the energy goes up.  They might not be able to arbitrarily raise rates unless the price of the commodity goes up. 

2. Analyze gross profit margin:

Calculate the gross profit margin by dividing gross profit by revenue and multiplying by 100. A higher gross profit margin suggests the company is efficiently managing its production costs and pricing. Compare the gross profit margin to previous periods and industry benchmarks to evaluate its competitiveness.  All companies can be improving this number.  What does it cost to produce the product?  The cost of the Revenues.    

3. Review operating expenses:

Analyze the operating expense section to understand the company’s cost structure. Identify major expense categories such as research and development, sales and marketing, and general administrative costs. Ensure that the company is not overspending in these areas relative to its revenue growth.  We are looking for companies that have a balanced approach to R&D. 

4. Calculate operating margin:

Calculate the operating margin by dividing operating income by revenue and multiplying it by 100. Operating margin measures the company’s profitability from its core operations. A higher operating margin indicates better operational efficiency. Compare it with historical data and industry peers to assess the company’s performance.

5. Consider non-operating items:

Evaluate non-operating income and expenses, such as interest income or expenses, gains or losses from investments, or one-time charges. These items can impact on the company’s overall profitability and should be considered when analyzing the income statement.

6. Assess net income and EPS:

Net income represents the company’s overall profitability after all expenses and taxes. Review the net income identify trends. Additionally, calculate the earnings per share (EPS) by dividing net income by the average number of outstanding shares. EPS indicates the portion of the company’s profit allocated to each share.

7. Compare with competitors:

Compare the company’s income statement metrics with its competitors in the industry. This analysis can help identify the company’s relative strengths and weaknesses.

8. Look for consistent growth and stability:

Seek consistent growth in revenue and net income, stable or improving profit margins, and controlled operating expenses. These factors suggest a financially sound and sustainable business.

Analyzing an income statement should be done with other financial statements, such as the balance sheet and cash flow statement, to get a comprehensive view of a company’s financial health. It’s also essential to consider qualitative factors, industry dynamics, and management strategies to make an educated decision to buy.

In buying a stock, it is always a good idea to buy companies with the best performing and improving metrics.  Your goal is to buy the strongest company.  This is not always the reason a company outperforms but at least you did your research. 

You should check with your financial advisor before making any investments! All investing has the risk for loss and you should make sure these investments are appropriate for you.