Stop investing in companies without knowing how they make money
I’ll show you how to read an income statement so you can find the most profitable companies in the market
Thread:
I’ll show you how to read an income statement so you can find the most profitable companies in the market
Thread:
To illustrate, let’s assume I own a furniture shop where I import furniture and then sell it to my customers.
An income statement has three main components:
1. Revenues
2. Cost of sales
3. G&A expenses
An income statement has three main components:
1. Revenues
2. Cost of sales
3. G&A expenses
Revenues:
Revenues are the sales your business brings in. This is obviously a crucial part of the business because not many businesses can survive without any sales!
If customers buy $1M of furniture from me in a year, my revenues is $1M.
Revenues are the sales your business brings in. This is obviously a crucial part of the business because not many businesses can survive without any sales!
If customers buy $1M of furniture from me in a year, my revenues is $1M.
Cost of sales:
This category of the income statement deals with costs that are directly related to selling.
In order to sell furniture, I need to buy furniture.
Assuming I bought $500k worth of furniture in a year and sold it all, my cost of sales will be $500k.
This category of the income statement deals with costs that are directly related to selling.
In order to sell furniture, I need to buy furniture.
Assuming I bought $500k worth of furniture in a year and sold it all, my cost of sales will be $500k.
G&A expenses:
This is where all overhead gets classified.
I may be renting a warehouse to store furniture, have an office clerk.
These costs aren’t directly tied to revenues. I would incur them whether or not I make any sales.
These costs are also known as “fixed costs.”
This is where all overhead gets classified.
I may be renting a warehouse to store furniture, have an office clerk.
These costs aren’t directly tied to revenues. I would incur them whether or not I make any sales.
These costs are also known as “fixed costs.”
Assume my G&A costs are $250k.
Now you the components to figure out Net Income.
Net income = revenues - cost of sales - G&A expenses.
In our example:
$1M - $500k - $250k = $250k
Now you the components to figure out Net Income.
Net income = revenues - cost of sales - G&A expenses.
In our example:
$1M - $500k - $250k = $250k
The $250k tells me how much money I made in a given year.
When investing, you want to make sure the businesses you buy generate positive earnings (there are some exceptions) so they can continue to reinvest the profits for more growth!
When investing, you want to make sure the businesses you buy generate positive earnings (there are some exceptions) so they can continue to reinvest the profits for more growth!
From the three main statements you need to understand, I’ve now covered the income statement and the balance sheet. If you haven’t seen my thread on the balance sheet, see below 👇
In my next thread, we’ll cover the cash flow statement.
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If you enjoyed this:
1. Follow me @practical_cpa for more content
2. RT the first tweet to share this thread with your audience
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