Understanding Profit & Loss Statement: Making Sense of Earnings!

A Guide on what is a Profit & Loss Statement and how to read it: One of the most important aspects an investor looks into before investing in a business is whether the business is profitable. That is how much earnings the company is making every quarter and year, along with how much is growing in the earnings compared to the last year or so. And this can be found by reading the Profit & Loss Statement of a company.

Today, we have a look at the financial statement that provides us with this earnings info i.e. the Profit & Loss Statement in order to better understand it. Let’s get started.

What is a P&L Statement?

A profit and loss statement (P&L) or income statement is a financial report that summarizes the revenues, costs, and expenses incurred over a given period of time. The P&L statement shows a company’s ability to generate sales, manage expenses, and create profits.  It is also known as the statement of operations.

Why do we need a P&L Statement?

For the sake of understanding the concept better take the example of a household that earns Rs.30,000 p.m. with the assumption that due to a tight budget it does not spend on assets. If a member of the family were to compute how he arrived at the savings for a month, how would he do so?

He would simply jot down all the incomes he receives from various sources and subtract that with the expenses say Rs 25,000 in order to arrive at the amount he has saved. Although in the case of a company we do not have savings, instead we try to find out the profit or loss from a similar but tabular method. We jot down the total revenue earned by the firm from all sources and subtract it with expenses in order to arrive at the respective profit or loss and that is exactly what the P&L statement does.

In the simplest words, the goal of a P&L statement is to measure the profits by excluding the expenses from the income and provide an overview of the financial health of the business. The profit and Loss statement shows exactly where the revenues come from to the business, and what are the costs and expenses that are paid for. It shows us the ability that a business has to manage its profits by either cutting costs or driving revenue.

The P&L Statement is very important to various stakeholders.

• Within the company, the statement shows where the company could be possibly lagging behind in generating revenue or on what costs and expenses the company is overspending and should reduce. Such information also helps then plan and budget for the coming years. The statement also provides insights into whether the profit margins they have allocated on the products are sufficient.
• For investors, the P&L statement answers the primary questions they have, which is whether the company is profitable or if it is making a loss? And even if it is doing so what are its prospects to breakeven or increase profits.
• The P&L statements also help other government entities and the tax departments to assess the tax position of the company.

Also read: 8 Financial Ratio Analysis that Every Stock Investor Should Know!

How to read a P&L statement?

 Before going through the tabular format let us have a look at the basic formula the P&L report is based on:

Revenue – Expenses = Profits

But arriving at Profits is not as simple as the formula depicts. There are various incomes and expenses that simply cannot be grouped together and they must be shown separately in order to aid future decision making. These include revenue, Income from other sources, operating expenses, other expenses, taxes, etc. 

This would expand the above formula to

1. Gross Profit = Net Sales – Cost of Sales
2. Operating Profit = Gross Profit – Operating Expense
3. Profit before Taxes = Net Operating Profit + Other Income − Other Expense
4. Net Profit (or Loss) = Net Profit before Taxes − Income Taxes

Looks confusing right. In addition simply following the above would make a comparison to previous years’ data or comparison with other companies difficult. Hence the P&L statement comes in a simple tabular format that makes understanding and comparison easier.

Format of the P&L statement

STATEMENT OF PROFIT & LOSS

Name of the Company…………………….

Statement of Profit and Loss for the period ended…………….

Particulars	Note No.	Figures as at end of current reporting period	Figures as at end of previous reporting period	Analysis
1	2	3	4
I. Revenue from operations		xxxx	xxxx	Here revenue on account of company’s main operating activity is shown.
II. Other income		xxxx	xxxx	Here, other revenue not arising out of company’s main operating activity is shown.
III. Total Revenue (I + II)		xxxx	xxxx
IV. Expenses:
Cost of materials consumed		xxxx	xxxx	This section is applicable for companies that manufacture their own products. This section will include the cost pertained to manufacture those products in the form of Raw Materials, Packing Material and other material such as purchased as intermediates and components which are consumed in the manufacturing activities of the company. This section also includes Semi-Finished Goods purchased for processing and subsequent sale.
Purchases of Stock-in-Trade		xxxx	xxxx	This is applicable to trading companies and would comprise of goods purchased normally with the intention to resell or trade in, without any processing / manufacture at their end.
Changes in inventories of finished goods work-in progress and Stock-in-Trade		xxxx	xxxx	This represents the difference between opening and closing inventories of finished goods, work-inprogress and stockin-trade. Such differences would be shown separately for finished goods, workin-progress and stock-in-trade.
Employee benefits expense		xxxx	xxxx
Finance costs		xxxx	xxxx
Depreciation and amortization expense		xxxx	xxxx
Other expenses		xxxx	xxxx	Expenses not covered above are required to be aggregated here. Examples of other expenses are consumption of stores and spare parts, power and fuel rent, repairs, insurance etc.
Total expenses		xxxx	xxxx
V. Profit before exceptional and extraordinary items and tax (III-IV)		xxxx	xxxx
VI. Exceptional items		xxxx	xxxx	Here total impact of the exceptional items like gain / loss on disposals of long-term investments, legislative changes having retrospective application, litigation settlements disposals of items of fixed assets and other reversals of provisions etc are to be shown.
VII. Profit before extraordinary items and tax (V - VI)		xxxx	xxxx
VIII. Extraordinary Items		xxxx	xxxx	Here total impact of the extraordinary items like expense related to previous periods, arising out of long term settlement with the employees, loss due to fire etc are to be shown.
IX. Profit before tax (VII- VIII)		xxxx	xxxx
X Tax expense: (1) Current tax (2) Deferred tax		xxxx	xxxx
XI. Profit (Loss) for the period from continuing operations (VII-VIII)		xxxx	xxxx
XII Profit/(loss) from discontinuing operations		xxxx	xxxx
XIII. Tax expense of discontinuing operations		xxxx	xxxx
XIV. Profit/(loss) from Discontinuing operations (after tax) (XII-XIII)		xxxx	xxxx
XV. Profit (Loss) for the period (XI + XIV)		xxxx	xxxx	This represents the profit after tax
XVI. Earnings per equity share:		xxxx	xxxx

Where to find the Profit & Loss Statement of a company?

If you want to find the last five years’ profit &loss statement of any publically listed company in India, you can use Trade Brains free stock research portal here.

Here, you can read the simplified profit and loss statement of any company that you’re researching from the list of over 5,000 publically listed companies in India. For this, simply go to https://portal.tradebrains.in/ and search the name/symbol of the company in the search bar. Then, you can go to the stock details page of that company to read its profit & loss statement.

Fig. Reliance Industries Annual P&L Result, Trade Brains Portal

Closing Thoughts

The profit and Loss statement has a very important role to play when it comes to guiding investment decisions. The Profit and Loss statement should however not be considered as the only basis for making decisions. The Profit and Loss statement includes expenses while computing Net Profit but leaves out any changes made to the assets and liabilities during the year.

Also, a high Net Profit will not necessarily mean that the company has adequate cash to spend. There is still a possibility that the company may have made a profit but still has a negative cash flow. The reasons for this can only be understood after viewing the Cash Flow Statement. A complete analysis using financial statements requires a combination of P&L Statement, Balance Sheet, and Cash Flow Statement.