What is an income statement?
The income statement (also called the profit and loss statement, or “P&L”) records performance over a period. At the top is revenue, the money earned from sales. Costs are then taken away step by step: the cost of making the goods, office and selling costs, interest on loans, tax. What is left at the bottom is net profit, the “bottom line”.
Unlike the balance sheet, it is not a snapshot of one day but a film of a period: what happened over the whole year from July to June. In Bangladesh most listed companies use a July–June financial year; banks, insurers and non-bank financial institutions usually use January to December.
Say Rahim runs a tea stall. In a month he sells Tk 60,000 of tea and biscuits. Tea leaves, milk, sugar and biscuits cost Tk 35,000, and rent and his helper’s wage Tk 15,000. At the end of the month Tk 10,000 is left. That is his stall’s little income statement. A large company’s works on the same logic, just with more lines. The numbers are only an example.
Why it matters to an investor
- Over time, a share’s price is tied to the company’s earning power. Whether it makes a profit, and whether that profit is growing or shrinking, shows up here.
- EPS (earnings per share), and the P/E ratio built on it, both come from this statement’s net profit.
- Putting the lines side by side for several years answers questions like: are sales rising while profit falls, and where are costs growing?
- Dividends are paid mainly out of profit. Without understanding the quality of profit, it is hard to judge whether a dividend can last.
The lines, top to bottom
- Revenue (sales or turnover): total income from selling goods or services.
- Cost of goods sold: the direct cost of making or buying what was sold, such as raw materials and factory wages. Revenue minus this is gross profit.
- Operating expenses: office, administration, advertising, distribution, depreciation. Gross profit minus these is operating profit, the profit from the core business.
- Finance cost: interest on loans. In a heavily indebted company, this line can eat much of the profit.
- WPPF: under Bangladesh’s Labour Act 2006, many profitable companies must set aside 5% of profit for a workers’ participation fund, so many statements show this line.
- Tax and net profit: what is left after tax is the shareholders’ profit. Divide it by the number of shares and you get EPS.
Margins: profit as a share of sales
Looking only at amounts always flatters bigger companies. So profit is also shown as a percentage of sales. Gross margin = gross profit ÷ revenue; operating margin = operating profit ÷ revenue; net margin = net profit ÷ revenue. A margin tells you how many taka are kept from every Tk 100 of sales.
Margins mean most when compared with the same company’s earlier years or with others in the same sector. A grocery-style business naturally has thin margins, medicines or software much wider ones. So there is no “good margin” without knowing the sector.
Quality of profit: where to be careful
- One-off income: a gain on selling land or a factory, or a compensation payment, can inflate one year’s profit but will not come back next year. Read the notes to see how much profit came from the core business.
- Profit is not cash: sales on credit are counted as revenue too. Whether the money actually came in shows on the cash flow statement.
- Quarter versus year: in Bangladesh companies publish unaudited figures every three months and audited figures at year end. For a seasonal business, judging the whole year from one quarter can mislead.
Worked example
- Say a made-up company, “Rupsha Foods Limited”, sells Tk 500 crore in a year. Cost of goods sold is Tk 350 crore. Gross profit: Tk 150 crore, a 30% gross margin.
- Office, selling and distribution costs are Tk 70 crore. Operating profit: Tk 80 crore (a 16% margin). After Tk 20 crore of loan interest, Tk 60 crore is left.
- To keep it simple, say WPPF and tax together come to Tk 15 crore. Net profit: Tk 45 crore (a 9% margin). The company has 10 crore shares.
Result: EPS = Tk 45 crore ÷ 10 crore shares = Tk 4.50 a share. From every Tk 100 of sales, Tk 9 was left for shareholders. The numbers are only an example.
Common mistakes
- Looking only at net profit, without checking where it came from: the core business or a one-off gain.
- Assuming rising sales mean the company is doing well, while margins shrink or costs grow faster.
- Treating profit and cash as the same thing.
- Drawing conclusions from one quarter or one year instead of the trend over several years.
The income statement says how much the company earned; a good investor asks where that profit came from, and whether it will come again.