Why do investors need to read the P&L? The profit and loss statement reveals the true story of the business.

If you are considering investing in any company, don’t just look at the stock price or rumors. The most appropriate way is to analyze the financial statements, especially the Profit and Loss Statement (P&L) or income statement, because this document reveals the truth about whether the company is truly profitable or just appears to be.

What is the Profit and Loss Statement (P&L)?

The profit and loss statement is a financial document that summarizes all revenues and expenses of a business over a specified period (monthly, quarterly, or yearly) to show whether the company ended the period with a profit or a loss.

A very basic formula:

• Total Revenue – Total Expenses = Net Profit (or Loss)

Understand that a sample P&L could be like this: Imagine selling rice bowls for a month, earning 100,000 baht, but spending 60,000 baht on raw materials, rent, and wages, leaving a profit of 40,000 baht. That’s all there is to the meaning of P&L.

Why should you look at the profit and loss statement?

1. To know if the company is truly profitable

Rising stock prices don’t mean the business is doing well. The P&L shows the real truth—whether the company is genuinely wealthy or just booming temporarily.

2. To see the sources of income

A company may have 5-6 different revenue streams. Looking at the P&L helps identify which sources are most profitable and which might be risky.

3. To find “fat” in expenses

Some companies may have good revenue but high expenses. The way to increase profit is to reduce costs. The P&L helps identify these areas.

4. To plan for future investments

By observing profit and loss patterns, you can better assess how the business might grow.

The structure of the P&L you need to know

The process from revenue to net profit involves several steps, each indicating different aspects:

Sales and Service Revenue (Sales) ↓ Less Cost of Goods Sold (Cost of Goods Sold) = Gross Profit (Gross Profit) ← Indicates pricing ability

↓ Less Operating Expenses (Operating Expenses) = Operating Profit (Operating Profit) ← Indicates management efficiency

↓ Less Financial Expenses and Taxes = Net Income (Net Income) ← The actual profit investors will receive

How to read the 4 steps of the profit and loss statement

Step 1: Check the period

It’s useless to compare the revenue of September to December. You need to compare the same period, e.g., P&L for 2024 should be compared with 2023.

Step 2: Check the final result first

Is the company currently making a profit or a loss? If “loss,” you might hold off on investing. If “profit,” continue reading.

Step 3: Look at the main sources of income

See where the revenue comes from. If profits come from core business, it’s safer than if they come from selling old assets.

Step 4: Analyze expenses

Are expenses high, low, or increasing compared to last year? Rapid increases might be a warning sign.

Example of reading a profit and loss statement: How to interpret it in practice

Suppose a bank reports for 2023:

• Total Revenue: Interest income 500 million + Fees 200 million + Other income 100 million = 800 million
• Expenses: Interest paid 300 million + Salaries 150 million + Other expenses 100 million = 550 million
• Net Profit: 800 – 550 = 250 million

Wherever you look, key points to observe:

• Highest interest income → Strong core business
• High interest expenses → Possibly due to high deposit costs or high rates to compete
• Net profit of 250 million → If last year was 200 million, it indicates growth

2 common formats of the profit and loss statement you should know

Report Format (Report Form)

Arranged in a top-down order: Revenue → Expenses → Profit, easy to understand and interpret.

Account Format (Account Form)

Written with two sides: expenses on the left, income on the right. Looks more formal and is often used in official financial reports.

It doesn’t matter which format is used; the data remains the same.

Key takeaways

Reading a profit and loss statement is not about just looking at numbers blindly. You need to understand that:

• Gross profit indicates whether the company is selling well.
• Operating profit shows how well the company manages its core business.
• Net profit reveals how much profit remains after all expenses.

Smart investors don’t buy stocks just because the price is rising. They dig into the financial statements, especially the P&L, to ensure the company is genuinely profitable, with profits coming from core business rather than luck.

But remember, a single P&L statement isn’t enough. You should also look at the balance sheet, cash flow, and other factors before making a well-informed investment decision.