How to analyze an income statement in less than 2 minutes:
The income statement answers two big questions:
1) Is this company “profitable”?
2) Is this company growing or shrinking?
It's a lot like looking at someone's personal budget
1) Is this company “profitable”?
2) Is this company growing or shrinking?
It's a lot like looking at someone's personal budget
Here’s what I focus on first when looking at an income statement:
1) Period: Quarter? Year?
2) Revenue: Direction?
3) Gross Profit: Direction?
4) Earnings Per Share: Positive?
5) Share Count: Direction?
6) Operating Costs: Direction?
1) Period: Quarter? Year?
2) Revenue: Direction?
3) Gross Profit: Direction?
4) Earnings Per Share: Positive?
5) Share Count: Direction?
6) Operating Costs: Direction?
Best Possible Answers:
1) Multiple Annual Periods
2) Growing quickly (30%+)
3) Growing faster than revenue
4) Growing faster than gross profit
5) Declining
6) Growing slower than revenue
1) Multiple Annual Periods
2) Growing quickly (30%+)
3) Growing faster than revenue
4) Growing faster than gross profit
5) Declining
6) Growing slower than revenue
Other areas I quickly glance at:
▪️Cost of Goods Sold: Direction?
▪️Non-Operating: Any big changes?
▪️Tax Rate: Stable?
▪️Basic + Diluted Shares: Big difference?
▪️Cost of Goods Sold: Direction?
▪️Non-Operating: Any big changes?
▪️Tax Rate: Stable?
▪️Basic + Diluted Shares: Big difference?
It's also VERY helpful to look at margins.
Simply divide each line item by sales.
I focus heavily on gross margin, operating margin, and net margin:
Simply divide each line item by sales.
I focus heavily on gross margin, operating margin, and net margin:
Some companies calculate margins for you, like $DG
Notice how gross, operating, and net margins are all DOWN
This means that $DG's COSTS are rising faster than REVENUE (not good!)
The difference might seem small, but margins matter A LOT!
Notice how gross, operating, and net margins are all DOWN
This means that $DG's COSTS are rising faster than REVENUE (not good!)
The difference might seem small, but margins matter A LOT!
Margins are best viewed over long periods of time.
The more stable they, the better the business
On that front, $DG margins look quite good.
The more stable they, the better the business
On that front, $DG margins look quite good.
Compare that to a cyclical business like $GOLD
Barrick Gold's margins are all over the map, which makes its future very hard to predict
(Its financials & margins are heavily influenced by gold prices)
Barrick Gold's margins are all over the map, which makes its future very hard to predict
(Its financials & margins are heavily influenced by gold prices)
Here are some Income Statement Yellow Flags to quickly look for, too:
I’d never invest without MUCH more analysis than this.
Accounting (and investing) is FILLED with nuance.
Still, with less than 2 minutes of analysis, you can quickly determine if a company is profitable, growing/shrinking, and worthy of a deeper dive.
Accounting (and investing) is FILLED with nuance.
Still, with less than 2 minutes of analysis, you can quickly determine if a company is profitable, growing/shrinking, and worthy of a deeper dive.
Want to learn how Warren Buffett analyzes an income statement?
Join me TOMOROW (9/14) for a webinar where we'll discuss his financial statements 'rules of thumb' in detail.
RSVP here (it's free):
lu.ma
Join me TOMOROW (9/14) for a webinar where we'll discuss his financial statements 'rules of thumb' in detail.
RSVP here (it's free):
lu.ma
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