Getting to grips with a company’s income statement

Fsp Invest, 27 Nov. 2013

Tags: income statement, what is the income statement, earnings per share, operating margin, what does the income statement show, fundamental analysis, investing,

If you want to find out how much money a company is getting in the door, then you have to check out the income statement. Not only does it show a company’s turnover, it shows its tax and interest payments. And it shows how much a company pays out in dividends. So read on to discover what you need to know about the income statement…

The income statement can be a good place to start, the research team at Red Hot Penny Shares explains…

The income statement shows:
  • The company’s turnover (revenue in the case of finance houses, banks and private equity firms);
  • Operating profit before interest and tax;
  • Interest paid or received;
  • Tax paid;
  • Net taxed profits;
  • Extraordinary costs;
  • Attributable profit; and
  • Dividends.
The company shows figures for both the current year and the previous year. In the case of a holding company, for instance if a company has subsidiaries, there will be a second set of figures. One for “company” and one for “group”.

You can use the group figures to assess the whole organisation. The figures for “company” will show you whether the holding company is a trading one, or simply a means to maintain a strategic overview of the whole organisation.

Remember to use one set of figures constantly, or you could end up double counting profits or debt and get a distorted picture of the group’s financial performance.

The income statement is a record of its achievements over the previous trading period.

You need to work out if a company appears to be growing in a sustainable manner. And you want it to do it in a way that creates extra value for its shareholders.

You want to that the company’s achieved steady turnover growth without sacrificing its operating margins. In other words the company wasn’t cutting prices merely to shift stock.

What to pay attention to in the income statement

When you look at the income statement, you want to pay attention to the operating margin and earnings per share.

You can calculate the operating margin, by dividing turnover (as a percentage) by operating profit before interest and tax. You don’t want to see these compromised over the years.

Earnings per share is the net profit divided by the number of shares in issue.

You can easily obtain a company’s annual reports from its website. To get the best idea of what’s going in, have a look through a few years.

So there you have it, what you need to know about the income statement.

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