Understand the income statement and grasp the company's true profitability

Profit and Loss Statement (P&L), is a core financial tool that investors and business operators must master. Through this report, you can clearly see the company’s sources of income, cost structure, and ultimately whether it has achieved profit or fallen into @E5@.

Seeing the company’s life and death in one chart: the essence of the Profit and Loss Statement

What is a P&L? Simply put, it is a financial report that records a company’s income, expenses, and final profit or loss over a specific period.

The core calculation formula is simple:

• Total Revenue - Total Expenses = Profit (or @E5@)

With this report, operators can discover:

• Whether the company is truly profitable
• The channels through which profits are generated
• Which cost items have room for compression

This is not just a financial record but a key basis for optimizing business strategies and responding to market changes.

What do different levels of profit in the P&L represent?

Profit in the P&L is not a single number but layered, each telling a different story.

Gross Profit = Revenue - Cost

This is the most direct profit indicator, reflecting whether your product or service pricing exceeds production costs. A high gross profit indicates strong product competitiveness.

Operating Profit = Gross Profit - Operating Expenses

This level of profit reflects whether the company’s daily operations are efficient. It excludes costs, showing the impact of marketing, management, transportation, and other routine expenses.

Net Income = Total Revenue - Total Expenses

This is the final answer—the amount remaining in the company’s pocket after paying all expenses and taxes. This figure determines whether the company can continue to grow.

How to quickly understand a P&L?

Step 1: Confirm the time frame

The P&L may cover a month, a quarter, or a year. The time frame determines your perspective on the data.

For example, the fiscal year 2566 P&L (January 1 to December 31) shows the cumulative performance for the entire year.

Step 2: Determine profit or @E5@

• Revenue > Expenses = Company has profit
• Revenue < Expenses = Company @E5@

This is the most basic and critical judgment.

Step 3: Track income sources

Different companies have very different income structures. For example, a bank’s income may include:

• Interest income
• Investment income
• Fee income
• Exchange gains
• Other business income

Understanding the diversification of income helps you assess the company’s risk resilience.

Step 4: Examine expense details

Expenses are also diverse:

• Interest expenses
• Employee costs
• Operating expenses
• Other expenditures

By comparing expense ratios over different periods, you can see whether management efficiency is improving.

Which format of P&L to choose?

Report Form

A simple structure that displays from top to bottom: Revenue → Expenses → Net Profit or @E5@.

Advantages:

• Easy to understand, logical clarity
• Clearly shows overall performance at a glance
• Suitable for quick analysis

Account Form

Places expenses on the left, income on the right, in a T-shaped arrangement.

Advantages:

• More detailed information, clear classification
• Easy to compare line by line
• Recognized officially

Both formats convey the same information; the choice depends on your habits and needs.

Why is the P&L so important?

Measure the company’s financial health

A good P&L allows investors and management to quickly understand the company’s earning ability and evaluate whether operations are moving in the right direction.

Identify profit models and efficiency

Through vertical comparison (different periods) and horizontal comparison (different departments), you can see which business lines generate profits and which fall into @E5@.

Forecast future performance

Historical data is the basis for predicting the future. Continuous analysis of the P&L can help you anticipate the company’s development direction.

Guide strategic decisions

Should costs be cut? Should new revenue channels be developed? Should new products be invested in? The answers are provided by the P&L.

Key tips for reading a P&L

Don’t just look at the bottom-line number. A company may show overall profit, but some departments may be @E5@, which requires in-depth investigation.

Pay attention to year-over-year growth. Compared to absolute figures, growth rates often better reflect the company’s dynamic performance.

Watch out for unusual items. One-time gains or expenses may mask the company’s true operating condition.

Integrate other financial statements. The P&L is only part of the full picture. Balance sheets and cash flow statements are equally important.

Summary

The Profit and Loss Statement (P&L) is an essential tool for understanding a company’s operating condition. By mastering how to read profit at various levels, track income and expenses, and determine profit or @E5@, you can make smarter investment and operational decisions.

But remember, any single indicator is not enough to tell the whole story. A comprehensive assessment considers the business model, management team quality, market prospects, and technological advantages, among other factors.