Stock Market Basics – Chapter 3: Income Statement

What is an Income Statement?

An income statement is a financial statement that summarises the revenue and expenses of a business. Additionally, it indicates if a business is profitable or not during a specified time period. Usually, the Income statement will be for 1 year, but you can also find quarterly and semi-annual statements. 

Along with the balance sheet and the cash flow statement, the income statement assists you in determining the financial health of the company.

The income statement is sometimes referred to as the profit and loss statement, statement of operations, financial result, income statement, or earnings statement.

This is the Income Statement of ITC limited for March 2021. Throughout the below-attached video, I have explained the Income Statement via this sheet.

Usually, an Income statement comparison will be done for 2 periods. As shown in this picture, the reference for 2020 & 2021. Here, the management is trying to convey how their performance has been since the past 1 year.

In an Incomes Statement. We have Income aka Revenue/Sales and then the Expenses. 

Income (-) Expenses = Profit Before Exceptional Items & Tax. 

(-) Exceptional Items and Tax, we get Profit After-tax or PAT. 

+/- Other Comprehensive Incomes and we get Distributable Profit.

This Distributable profit will be divided into each Equity share and you get Earnings Per Share.

The top right corner shows the period for which the Statement is for. And, it also says that the amounts are in crores. 

2nd Column shows the various notes to accounts. They elaborate on the line items. For example; 

21A represents “Revenue from Operation” – Here, you get bifurcation of revenue from products & services and other revenues. They have also given an explanation of what the other revenue is for.

And, under 21B part of “Revenue from Operation,” we get to see the area-wise segregation of ITCs income. 

Similarly, the entire sheet contains various notes. Follow it and you’ll get an explanation of what the line item is telling.

When reading the Income Statement as an Investor:

  • We want Revenue from Operations to yield more money. Obviously, we need core business to earn more! If not, the Other Incomes can be anything. And that can mislead Investors.
  • When it comes to Expenses, check what the business is and whether such expenses are justifiable. For Eg: ITC is an FMCG company, the cost of materials consumed is obvious, and stock in trade will be there. But, would these kinds of expenses be available for a Banking company? Or Insurance company or any other? Maybe under circumstances, but not as huge as 25% of Total Incomes. Right?
  • Similarly, A Banking Company’s expenses include “Provisions & Contingencies” Because, in a lending business, contingencies are normal. But, this expense will be very minimal in an FMCG business.
  • So, You’ll understand the nature of business via its Incomes statement.
  • Exceptional items are costly events that affect an organization’s bottom line but should not be interpreted as gains or losses in typical business operations. Give importance to them if the numbers are huge.
  • Other comprehensive income (OCI) is a term used in corporate accounting to refer to revenues, expenses, profits, and losses that have not yet been realized and are therefore omitted from net income on an income statement. OCI is a measure of the difference between net and comprehensive income. For example, OCI is frequently used to refer to a portfolio of bonds that have not yet matured and, as a result, have not been redeemed. Gains or losses on fluctuating bond values cannot be established in full until the bonds are sold; hence, interim adjustments are reported in other comprehensive income.
  • After comprehensive incomes/expenses adjustments are made. We get net Profit. The ones which are available for Equity Shareholders. This is what we call Earnings Per Share.

I hope, I have given you some clarity in regards to how to read an Incomes Statement as an Investor.

Video explaining “Stock Market Basics – Income Statement”

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