101.school
CoursesAbout
Search...⌘K
Generate a course with AI...

    Investing in the Stock Market 101

    Receive aemail containing the next unit.
    • Introduction to Investing
      • 1.1Why Invest in Stocks?
      • 1.2Risk and Return: The Investing Basics
      • 1.3Understanding Financial Markets
    • Principles of Investing
      • 2.1Principles of Value Investing
      • 2.2Principles of Growth Investing
      • 2.3Principles of Income Investing
    • Types of Investments
      • 3.1Stocks
      • 3.2Bonds
      • 3.3Mutual Funds and ETFs
    • How to Read Financial Statements
      • 4.1Reading Balance Sheets
      • 4.2Evaluating Income Statements
      • 4.3Understanding Cash Flow Statements
    • Analyzing Stocks
      • 5.1Introduction to Stock Analysis
      • 5.2Fundamental Analysis
      • 5.3Technical Analysis
    • Building an Investment Portfolio
      • 6.1Diversification and Asset Allocation
      • 6.2Portfolio Rebalancing
      • 6.3Risk Management
    • Strategies for Long-Term Investing
      • 7.1Dollar Cost Averaging
      • 7.2Buy and Hold Strategy
      • 7.3Retirement Investing
    • Preparing for Market Uncertainties
      • 8.1Market Trends and Economic Indicators
      • 8.2Investing during Recessions
      • 8.3Investing during Market Bubbles and Crashes

    How to Read Financial Statements

    Evaluating Income Statements: A Guide for Investors

    financial statement of a company: shows the company’s revenues and expenses during a particular period

    Financial statement of a company: shows the company’s revenues and expenses during a particular period.

    An income statement, also known as a profit and loss statement, is one of the three main financial statements used by investors to evaluate a company's financial performance and make investment decisions. It provides a detailed breakdown of a company's revenues, costs, expenses, and profits over a specific period.

    Understanding the Structure of an Income Statement

    An income statement is structured in a step-down format, starting with total revenue at the top and gradually subtracting various costs and expenses to arrive at net income at the bottom.

    Revenue

    Revenue, also known as sales, is the money a company earns from its business activities. It's typically broken down into operating revenue, which comes from a company's core business operations, and non-operating revenue, which comes from secondary sources like investments or asset sales.

    Expenses

    Expenses are the costs incurred by a company in the process of earning revenue. They're typically divided into:

    • Cost of Goods Sold (COGS): The direct costs of producing the goods or services a company sells.
    • Operating Expenses: The indirect costs related to running the business, such as salaries, rent, and utilities.
    • Non-Operating Expenses: Costs that aren't directly tied to a company's core business operations, such as interest payments on debt.

    Earnings Before Interest and Taxes (EBIT)

    EBIT, also known as operating profit, is a measure of a company's profitability from its core business operations, excluding interest and taxes. It's calculated by subtracting COGS and operating expenses from revenue.

    Net Income

    Net income, also known as net profit or bottom line, is the final profit a company makes after subtracting all costs and expenses, including taxes and interest, from its revenue. It's the most comprehensive measure of a company's profitability.

    The Importance of Margins

    Margins are a key aspect of an income statement and provide valuable insights into a company's profitability.

    • Gross Margin: This is calculated by subtracting COGS from revenue and dividing the result by revenue. It shows how efficiently a company produces its goods or services.
    • Operating Margin: This is calculated by subtracting operating expenses from gross profit and dividing the result by revenue. It shows how efficiently a company runs its core business operations.
    • Net Profit Margin: This is calculated by dividing net income by revenue. It shows how much of each dollar of revenue a company keeps as profit after all costs and expenses.

    In conclusion, an income statement provides a detailed picture of a company's financial performance over a specific period. By understanding how to read and interpret an income statement, investors can make more informed decisions about which stocks to buy or sell.

    Test me
    Practical exercise
    Further reading

    Good morning my good sir, any questions for me?

    Sign in to chat
    Next up: Understanding Cash Flow Statements