Anyone interested in active investing, picking stocks or investigating the financial health of a company must know how to read financial statements, including the P&L. The importance of the information contained in the P&L cannot be overemphasized.
HOW IT WORKS (EXAMPLE):
The P&L is also known as a statement of earnings, statement of operations, or statement of income.
The basic equation on which a P&L is based is:
Revenues – Expenses = Net Income
All companies need to generate revenue to stay in business. Revenues are used to pay expenses, interest payments on debt and taxes owed to the government. After the costs of doing business are paid, the amount left over is called net income. Net income is theoretically available to shareholders, though instead of paying out dividends, the firm’s management often chooses to retain earnings for future investment in the business.
P&Ls are all organized the same way, regardless of industry. The basic outline is shown in the following example:
Why It Matters:
The profit and loss statement (P&L), also called the income statement, is one of the three primary financial statements used to assess a company’s performance and financial position (the two others being the balance sheet and the cash flow statement). The P&L summarizes the revenues and expenses generated by the company over the entire reporting period.
