Checking Out the Income Statement

Checking Out the Income Statement

The income statement is where a company periodically reports its revenues,
costs, and net earnings or profit. It’s basically a snapshot of how much a
company is earning from its operations and any extraordinary earnings that
may have impacted its bottom line during a specific period of time. From the
income statement, you’ll be able to determine the impact of taxes, interest,
and depreciation on a company’s earnings and to forecast earnings potential.
Every income statement has three key sections: revenue, expenses, and
income. The revenue section includes all money taken into the company by
selling its products or services minus any costs directly related to the sale
of those products or services (called cost of goods sold). The expenses
section includes all operating expenses for the company not directly related
to sales, as well as expenses for depreciation (writing off the use of equipment
and buildings — tangible assets), amortization (writing off the use of patents,
copyrights, and other intellectual property or intangible assets such as
goodwill), taxes, and interest.


The income section includes various calculations of income. Usually you’ll
find one calculation that shows income after operating expenses and before
interest, taxes, depreciation, and amortization, called EBITDA. This will be
followed by net income, which is the bottom line showing how much a
company earned after all its costs and expenses were deducted. Public
companies must file financial reports with the OSC and the SEC on a quarterly
and annual basis. You can read any public company’s financial reports at Canada’s System for Electronic Document Analysis and Retrieval (SEDAR)
(www.sedar.com) and at the EDGAR Web site (www.sec.gov/edgar.
shtml) for American issuers.

A year’s worth of figures won’t show you much, so you need to look at the
trends throughout a number of years to be able to forecast growth potential
or assess how well a company is doing compared with its competitors. We
discuss a number of good sources for finding fundamental information in



Both quarterly and annual reports are important. Comparing a company’s
results on a quarter-to-quarter basis gives the trader an idea of how well the
company is meeting analysts’ expectations as well as the company’s projections.
Also, looking at, for example, results for the first quarter of 2008 versus the
first quarter of 2009 you can see whether a company’s earnings are increasing
or decreasing in a similar market environment. While for some types of
companies the first quarter is generally productive, other types of companies,
such as retail stores, are dependent mostly on fourth-quarter holiday results,
so you need to know what is expected in earnings for the various quarters.
Quarterly results allow you to monitor results from similar time periods.
Annual statements give you a summary for the year. You can also compare
current-year results to the results over a number of years to see at what rate
the company is growing.

Revenues

The first line of any income statement includes the company’s sales revenues.
This number reflects all the sales that have been generated by the company
before any costs are subtracted. Rather than go to all the trouble of showing
their math — gross sales — any sales discounts, adjustments for returns, or
other allowances = net sales. Most companies show only net sales on their
income statements. From these figures, you want to see obvious signs of
steady growth in revenues. A decrease in revenues from year to year is a
red flag that indicates problems — it’s probably not a good potential trading
choice unless you’re considering shorting the stock.