Revenue, expenses, profit and earnings
- Read the main lines of an income statement
- Tell gross, operating and net profit apart
- Understand earnings per share
The income statement
The income statement shows what a company sold and what it spent over a period, usually a quarter or a year. It flows from the top line to the bottom line.
Revenue (sales) is the money customers paid. Cost of goods sold is what it cost to make or deliver those products. Revenue minus cost of goods sold is gross profit.
From gross profit to net income
Next come operating expenses: salaries, rent, marketing, research. Gross profit minus operating expenses is operating income, the profit from running the business.
After interest and taxes you reach net income, often called earnings or the bottom line. This is the profit that belongs to shareholders.
Earnings per share
Earnings per share (EPS) divides net income by the number of shares. A company earning $500 million with 250 million shares has EPS of $2.
EPS lets you compare profit per share over time. If the company buys back shares, EPS can rise even when total profit is flat, so look at both.
Quality matters
Not all profit is equal. One-off gains, such as selling a building, can inflate a single year. Companies also report ‘adjusted’ figures that exclude some costs; read what was excluded and why.
Steady, growing profit from the core business is usually more valuable than a jumpy series of one-off results.
Revenue $10,000. Cost of goods sold $6,000, so gross profit is $4,000 (a 40% gross margin). Operating expenses $2,500, so operating income is $1,500. Interest $100 and tax $350 leave net income of $1,050.
With 500 shares outstanding, EPS = $1,050 ÷ 500 = $2.10.
Key terms
- Income statement
- A report of revenue, expenses and profit over a period.
- Revenue
- Money received from selling products or services; the top line.
- Cost of goods sold
- Direct costs of producing what was sold.
- Gross profit
- Revenue minus cost of goods sold.
- Operating income
- Gross profit minus operating expenses; profit from the core business.
- Net income
- Profit after all expenses, interest and taxes; the bottom line.
- Earnings per share (EPS)
- Net income divided by the number of shares outstanding.
Open a large company in Stock Analysis. In Fundamentals, note its revenue growth and earnings growth. Do they move in the same direction?
Key takeaways
- Revenue is the top line; net income is the bottom line.
- Operating income shows how the core business performs.
- EPS is profit per share; buybacks can lift it.
- Separate repeatable profit from one-off items.