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How to Read an Income Statement

Steven Levine, Founder of TickerPosts and OpenClassActions.com1 min readLast reviewed

An income statement shows a company's revenue, expenses, and profit over a period of time. It helps investors see whether sales are turning into earnings.

Start at the top line

Revenue is often called the top line because it appears near the top of the statement. It shows how much the company sold before subtracting expenses.

Next, look at cost of revenue or cost of goods sold. Revenue minus those costs equals gross profit. Gross profit tells you how much money is left after direct costs, before corporate overhead, sales costs, research, interest, taxes, and other items.

Follow the path to net income

The income statement usually moves through several layers:

  • Revenue.
  • Gross profit.
  • Operating expenses.
  • Operating income.
  • Interest and other income or expense.
  • Taxes.
  • Net income.

Each layer answers a different question. A company can grow revenue but lose money if costs rise faster. It can also show net income because of a one-time gain that may not repeat.

Compare periods, not just one report

One quarter rarely tells the whole story. Compare the latest income statement with prior quarters and prior years. Ask whether revenue is growing, margins are expanding or shrinking, and management explains the changes clearly.

Then check the cash-flow statement. Earnings quality is stronger when profit is backed by cash generation.

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