The income statement (or "P&L") tells the story of a company's profitability over a period. Read top to bottom, it shows how much of every sales dollar survives to become profit.
From the top line to the bottom line
| Line | What it is |
|---|---|
| Revenue (sales) | The total money brought in — the "top line". |
| Cost of goods sold | The direct cost of producing what was sold. |
| Gross profit | Revenue minus cost of goods sold. |
| Operating expenses | Running the business: salaries, marketing, research, rent. |
| Operating profit | What's left after the cost of actually operating. |
| Net income | The final profit after interest and tax — the "bottom line". |
The three margins that matter
Dividing each profit figure by revenue gives a margin — the share of every sales dollar kept at that stage. Gross margin shows pricing power, operating margin shows how efficiently the business runs, and net margin shows what finally reaches shareholders.
Example: a company with $100 of revenue, $60 cost of goods, $25 operating expenses and $5 of tax and interest has a 40% gross margin, a 15% operating margin and a 10% net margin.
What to look for
One year tells you little. Compare margins over several years and against rivals: rising margins suggest a strengthening business, while shrinking margins can be an early warning that competition or costs are eating into profit.
