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Income statement bottom lines
Income statement bottom lines explains the bottom line revenue report telling revenues and costs during the reporting period. A year or 3 month quarter gets covered as the reporting period. Investors use this information to understand the financial health of the company.
Simple Numbers Track Money, lesson 4
Income statement bottom lines explains the bottom line report telling how much revenue came in during the reporting period. On an annual report that period is a year. But for the quarterly reports the numbers cover the past three months.
Income statement bottom lines explains how investors use income statement information. This is lesson 3 of the Simply Numbers course that explains company financial reports. Links at the end guide you to related lessons if you want to learn more.
Getting to the bottom line on income statements
Income statements begin by showing all the revenue that came in during the period. Then it lists the cost of producing the product or service that generated that revenue. Listed below are all expenses incurred during the quarter or statement period.
Starting at the top, the revenue or total sales, is a positive number. Then all the costs of producing the product or expenses of running the business get taken away. Anything left over becomes bottom line. A positive number shows earnings. It tells us that revenues were able to more than cover all expenses. A negative number gives us the bad news of a loss! And that gets us asking more questions!
Get the most from an income statement, follow the money!
Follow the money by starting at the top of the income statement. That total revenue number includes revenue from all operations of the business. Then work your way down the statement. Deduct each cost listed. Work your way down line by line. That gives you great insight into what the company does well. As important, it helps you see what they do less well.
The first costs shown are any discounts or returns to show “net sales”.
Next the accountants show us the costs of producing the goods sold. That is the “cost of goods” number. Take it off and we end up with “gross profit”.
When operations are poor gross profit can be zero or less! We must ask for an explanation! We do not want to invest in a company that does not make money. Just move on without looking further!
Like any rule or guideline in business, there can be exceptions. For example a startup begins with no revenue but costs do start.
When we look at an income statement of any business, we take along common sense and good judgement.
We must understand expenses
With gross profit, we have to look further down the list of expenses. We look to see if any revenue makes it to the bottom line. Before we get the profit we want, the bills have to be paid. The list shows all expenses or costs of every part of the normal operating costs. Work your way down the list. That gives you a good understanding of what it takes to keep the company running. You can review each expense item with a critical eye. Doing that can make you think of many questions to ask management. Their answers always help improve your understanding of the business.
Finally, anything left over gets to the bottom line! The profit!
Compare numbers year by year to understand the income statement message
As when we looked at the balance sheet, the numbers from the previous year help us better understand the company. We can see any changes and understand where growth or problems happen. Drastic changes need clarification. Never hesitate to ask questions.
Basic number crunching helps us better understand investments
Dividing that bottom line number by the total number of shares gives us the “earnings per share” or EPS. That is the amount of money each share, earned by investing in this company.
Choose who gets the money…will it be dividends or growth?
Well run dividend paying companies share part of the profit with investors. We can’t get it all! Better companies retain earnings to grow and expand the business. Management and directors decide how much to pay out. Prudent decision-making and on-going plans determines how much to pay out as dividends.
Companies need retained profits to grow or to reinvest in the business. We do not want them to distribute all the earnings. In high growth companies the best use of capital is growing the business and paying no dividends.
The numbers, ratios between them and changes gives us insight into the operations of a business. Many accountants, MBAs and analysts keep very busy analyzing business numbers. Reports they write are based on a deep study of the numbers. Those reports give you much useful information.
Apples, oranges, candlesticks and numbers
It is also useful to compare numbers between companies in the same industry. Doing that gives us further insight and understanding.
Comparing different companies is much more difficult. We can compare between apple growers as they will be much the same. Comparing them to a baker or an insurance company is not as easy.
Checking out an investment in an apple farm, bakery or an insurance company takes much more work. That process will give us the needed understanding.
Comparing between different companies in different industries gets complicated. We will need to examine each industry as well as each business. To do it well we have to learn about the normal practices and differences in each industry. Doing so can find the best company or industry for us to invest in.
What about the cash
We want bottom line but we also need to know where the cash comes from and gets used. We want positive cash flow!
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Simple Numbers Track Money, lessons:
Introduction to Simply Numbers Tracking The Money Lesson 1
Financial statement numbers exposed Lesson 2
Balance sheet numbers exposed Lesson 3
Income statement bottom lines Lesson 4
Cash flow money goes Lesson 5
Analyzing, analysts and investing numbers Lesson 6
Next lesson 5: Cash flow money goes
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Bryan
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Bryan Kelly
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About the Author Bryan Kelly
Bryan Kelly uses White Top Investor to share his extensive investment knowledge and experience. He introduces strategies like the No-Worry Investor and the Index-Plus Layered Strategy, which encourage investor growth through personalized investment plans aligned with their unique circumstances and goals. By helping investors make money work for them and avoid common pitfalls, he aims to support the individual growth of wealth-building investors who can create secure, comfortable financial independence. With decades of experience, Bryan is committed to making stock market success accessible to anyone ready to take control of their financial future. The About page shares the story of his daughter's question that inspired the creation of White Top Investor.
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