An income statement reports the company’s financial performance over a given period of time and showcases a business’s profitability. It can be used to predict future performance and assess the capability of future cash flow. You might also hear people refer to this as the profit and loss statement (P&L), statement of operations, or statement of earnings.
The “top line” of the income statement displays the business revenue in a given period of time. Cost of goods sold (COGS) and other operating expenses are deducted from revenue. The net income, or “bottom line,” is the remainder after all revenues and expenses have been accounted for.
Here are important analysis ratios to compute when reviewing your income statement:
Gross profit margin is the percentage of revenue remaining after deducting your cost of goods sold. This is calculated by dividing gross profit by revenue from sales.
Gross Profit Margin = Gross Profit ÷ Revenue from Sales
Operating profit margin indicates the amount of revenue left after COGS and operating expenses are considered. The formula for calculating operating margin is operating earnings divided by revenue.
Operating Profit Margin = Operating Earnings ÷ Revenue
Net profit margin is the percentage of revenue after all expenses have been deducted from sales, and it indicates how much profit a business can make from its total sales. Net profit divided by revenue gives you the net profit margin.
Net Profit Margin = Net Profit ÷ Revenue
Revenue growth is the percentage of growth during a given time period. To calculate this, subtract last period’s revenue from the revenue this period, and then divide by last period’s revenue.
Revenue Growth (%) = (Revenue from Current Period – Revenue from Previous Period) ÷ Revenue from Previous Period