If you invest in stocks, then you MUST know how to read an Income Statement
Here’s an easy to follow system with everything you need to know.
I've used a coffee shop example to simplify:
🧵
Here’s an easy to follow system with everything you need to know.
I've used a coffee shop example to simplify:
🧵
1/22
Firstly, I have to credit the Maven course I did by @BrianFeroldi and @Brian_Stoffel_
- Financial Statements Explained Simply
Insightful, fun & interactive.
It’ll have you "interpreting Financial Statements like a pro".
Link (not affiliated):
maven.com
Firstly, I have to credit the Maven course I did by @BrianFeroldi and @Brian_Stoffel_
- Financial Statements Explained Simply
Insightful, fun & interactive.
It’ll have you "interpreting Financial Statements like a pro".
Link (not affiliated):
maven.com
@BrianFeroldi @Brian_Stoffel_ 2/22
The Income Statement is also known as a Profit and Loss statement.
It shows a company's revenue, expenses and profit over a period of time.
This could be over a quarter, 6 months or 12 months.
The Income Statement is also known as a Profit and Loss statement.
It shows a company's revenue, expenses and profit over a period of time.
This could be over a quarter, 6 months or 12 months.
@BrianFeroldi @Brian_Stoffel_ 3/22
The income statement starts with revenue at the top and we subtract costs as we go down, to end at the profit. Also known as income or earnings.
The income statement starts with revenue at the top and we subtract costs as we go down, to end at the profit. Also known as income or earnings.
@BrianFeroldi @Brian_Stoffel_ 4/22
Revenue:
This is the money that the coffee shop brings in from selling coffee.
Revenue:
This is the money that the coffee shop brings in from selling coffee.
@BrianFeroldi @Brian_Stoffel_ 5/22
Cost of Goods Sold (COGS):
This is the cost of ingredients and other supplies needed to make the product (coffee) that the coffee shop sells.
This might include water, coffee beans, and milk.
Cost of Goods Sold (COGS):
This is the cost of ingredients and other supplies needed to make the product (coffee) that the coffee shop sells.
This might include water, coffee beans, and milk.
@BrianFeroldi @Brian_Stoffel_ 6/22
Gross Profit:
This is calculated by subtracting COGS from revenue.
It shows how much the coffee shop is making, before accounting for Operating Expenses.
This is one of my favorite metrics to review, year on year or when comparing alternative companies.
Gross Profit:
This is calculated by subtracting COGS from revenue.
It shows how much the coffee shop is making, before accounting for Operating Expenses.
This is one of my favorite metrics to review, year on year or when comparing alternative companies.
@BrianFeroldi @Brian_Stoffel_ 7/22
Operating Expenses (OPEX):
These are the costs of running the coffee shop on a day-to-day basis.
Common categories of OPEX might include:
- Rent and utilities
- Insurance and legals
- Marketing and advertising
Operating Expenses (OPEX):
These are the costs of running the coffee shop on a day-to-day basis.
Common categories of OPEX might include:
- Rent and utilities
- Insurance and legals
- Marketing and advertising
@BrianFeroldi @Brian_Stoffel_ 8/22
Operating Income:
This is the profit that the coffee shop makes from its ongoing operations, after accounting for COGS and OPEX.
It can also be called “EBIT”
= Earnings Before Interest and Taxes
Operating Income:
This is the profit that the coffee shop makes from its ongoing operations, after accounting for COGS and OPEX.
It can also be called “EBIT”
= Earnings Before Interest and Taxes
@BrianFeroldi @Brian_Stoffel_ 9/22
Interest Expense:
If the coffee shop has any debt, this is the amount of money it pays in interest on that debt.
This number can also be positive, if the shop generates more interest than it spends.
Interest Expense:
If the coffee shop has any debt, this is the amount of money it pays in interest on that debt.
This number can also be positive, if the shop generates more interest than it spends.
@BrianFeroldi @Brian_Stoffel_ Pre-tax Income:
This is the coffee shop's profit before taxes are taken into account.
This is the coffee shop's profit before taxes are taken into account.
@BrianFeroldi @Brian_Stoffel_ 10/22
Income Tax Expense:
The amount of money that the coffee shop has to pay in taxes.
Income Tax Expense:
The amount of money that the coffee shop has to pay in taxes.
@BrianFeroldi @Brian_Stoffel_ 11/22
Net Income:
Also called “Earnings’ or “Profits”.
This is the coffee shop's final profit, after all expenses have been accounted for.
We want this number to be positive.
Net Income:
Also called “Earnings’ or “Profits”.
This is the coffee shop's final profit, after all expenses have been accounted for.
We want this number to be positive.
@BrianFeroldi @Brian_Stoffel_ 12/22
A useful investing metric to calculate, from the company’s profit is:
- Earnings Per Share (EPS).
How?
A useful investing metric to calculate, from the company’s profit is:
- Earnings Per Share (EPS).
How?
@BrianFeroldi @Brian_Stoffel_ 13/22
If the coffee shop was publicly traded, this is the profit that each share of stock is entitled to.
It's calculated by dividing earnings by the number of outstanding shares.
E.g
If the coffee shop was publicly traded, this is the profit that each share of stock is entitled to.
It's calculated by dividing earnings by the number of outstanding shares.
E.g
@BrianFeroldi @Brian_Stoffel_ 14/22
If a company makes $5 million and has 1 million shares outstanding, each share is entitled to $5.
EPS is $5 million / 1 million = $5 per share
EPS is a good comparison metric, when assessing alternative investments.
If a company makes $5 million and has 1 million shares outstanding, each share is entitled to $5.
EPS is $5 million / 1 million = $5 per share
EPS is a good comparison metric, when assessing alternative investments.
@BrianFeroldi @Brian_Stoffel_ 15/22
The Income Statement shows you how much money a company is making and what it's spending.
Comparing Income Statements from different periods, can help you understand if a company is growing or shrinking.
We want companies that are showing consistent growth.
The Income Statement shows you how much money a company is making and what it's spending.
Comparing Income Statements from different periods, can help you understand if a company is growing or shrinking.
We want companies that are showing consistent growth.
@BrianFeroldi @Brian_Stoffel_ 16/22
For example, let's say that in Q1:
A coffee shop had:
- $100,000 in revenue
- $50,000 in COGS, and
- $20,000 in OPEX.
That would give them a:
- $50,000 gross profit
- $30,000 operating income
- $25,000 net income
For example, let's say that in Q1:
A coffee shop had:
- $100,000 in revenue
- $50,000 in COGS, and
- $20,000 in OPEX.
That would give them a:
- $50,000 gross profit
- $30,000 operating income
- $25,000 net income
@BrianFeroldi @Brian_Stoffel_ 17/22
In Q2 if their:
- Revenue increased to $110,000
- COGS stayed at $50,000
- OPEX increased to $22,000
Then their profits would increase to:
- $60,000 gross profit
- $38,000 operating income
- $32,000 net income
In Q2 if their:
- Revenue increased to $110,000
- COGS stayed at $50,000
- OPEX increased to $22,000
Then their profits would increase to:
- $60,000 gross profit
- $38,000 operating income
- $32,000 net income
@BrianFeroldi @Brian_Stoffel_ 18/22
By comparing these two periods, you can determine if the business is growing and importantly, the PACE OF GROWTH.
By comparing these two periods, you can determine if the business is growing and importantly, the PACE OF GROWTH.
@BrianFeroldi @Brian_Stoffel_ 19/22
Understanding a business's language (accounting) is a fundamental skill for successful investing.
Learning how to read an Income Statement will allow you to quickly determine if a company is profitable, growing and worth looking into further.
Understanding a business's language (accounting) is a fundamental skill for successful investing.
Learning how to read an Income Statement will allow you to quickly determine if a company is profitable, growing and worth looking into further.
@BrianFeroldi @Brian_Stoffel_ 20/22
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We built a free "Toolkit For The Value Investor".
With all our favorite resources for finding great companies.
One of the tools lets you see what stocks Buffett, Munger or Howard Marks are buying.
Get it FREE here:
valueinvestoracademy.com
@BrianFeroldi @Brian_Stoffel_ 21/
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Thanks!!!
Follow us for more on:
- Investing
- Mental Models
- Books
@ValueInvestorAc
If you enjoyed this, please help us reach a greater audience by retweeting the first tweet of the thread.
Thanks!!!
@BrianFeroldi @Brian_Stoffel_ 22/22
Great learning resources that teach you more business and investing fundamentals:
@BrianFeroldi
@Brian_Stoffel_
@10kdiver
@MnkeDaniel
@QCompounding
And we try to:
@ValueInvestorAc
Great learning resources that teach you more business and investing fundamentals:
@BrianFeroldi
@Brian_Stoffel_
@10kdiver
@MnkeDaniel
@QCompounding
And we try to:
@ValueInvestorAc
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