How to read an income statement
The income statement shows whether a business made or lost money. Here's how to read it from the top line to the bottom line.
What it shows
The income statement (also called the profit-and-loss account) shows whether a company made or lost money over a period. It starts with sales at the top and subtracts costs line by line until you reach the profit at the bottom — which is why people talk about the "top line" (revenue) and "bottom line" (net profit).
The flow, top to bottom
| Line | What it is |
|---|---|
| Revenue | Total sales (the top line) |
| − Cost of sales | Direct cost of making the product |
| = Gross profit | What's left to run the business |
| − Operating costs | Overheads, wages, R&D |
| = Operating profit | Profit from core operations |
| − Interest & tax | Cost of debt and the taxman |
| = Net profit | The bottom line |
The margins that matter
Divide each profit line by revenue to get a margin: gross margin, operating margin and net margin. Rising margins over time suggest pricing power or efficiency; falling ones suggest competition or cost pressure. Comparing margins to sector peers tells you a lot about business quality.
One caution: profit is an accounting figure shaped by judgement calls. Always cross-check it against the cash flow statement — a company reporting profit but no cash deserves a hard look.