A story over time
Where a balance sheet is a snapshot, the income statement covers a period, such as a quarter or year. It starts with sales and subtracts costs on the way down to profit. It is the heart of every earnings report.
The lines, top to bottom
- [Revenue](/glossary/revenue) (sales): money earned from customers.
- Cost of goods sold: direct costs of making the product or service.
- Gross profit: revenue minus cost of goods sold.
- Operating expenses: selling, marketing, research, administration.
- Operating income: gross profit minus operating expenses. Profit from the core business.
- Interest and taxes: what the company pays lenders and governments.
- Net income: what is left, the “bottom line.”
A made-up example
A company reports 1,000 in revenue, 600 in cost of goods sold and 250 in operating expenses. Gross profit is 400 (a 40% gross margin) and operating income is 150 (a 15% operating margin). After 30 of interest and tax of 30, net income is 90, a 9% net margin. With 100 shares outstanding, EPS is 0.90.
What to watch
- Revenue growth: is it speeding up or slowing?
- Margins: are they stable, rising or shrinking?
- One-time items: unusual gains or charges can distort net income. Many companies also report “adjusted” figures, so read what was adjusted.
Connect it to valuation
EPS feeds the P/E ratio. A company with rising revenue, stable margins and growing EPS tends to be viewed more favorably than one with falling margins.
Quick answers
Why can a profitable company run out of cash?
Profit includes items that are not cash yet, like sales on credit. That is why you also read the cash flow statement. See [free cash flow](/learn/free-cash-flow-explained).