Chapter 9: Profit & Loss Guide
The Profit & Loss Statement (P&L) shows how a company makes money and how profitable it is over a period of time.
This guide builds on the Order Book Guide and introduces the core financial concepts used when analysing companies.
Progress: Chapter 9 of 16
📌 What You Will Learn
- How to read a profit & loss statement
- Key financial terms (revenue, profit, expenses)
- The difference between operating and net profit
- How to interpret company performance
📊 What is a Profit & Loss Statement?
The P&L shows a company’s financial performance over a period (usually a year or half-year).
It answers:
- How much money the company earned
- How much it spent
- How much profit it made
You can view this data on any company page:
Company Page Guide
🔄 The Profit Flow (Step by Step)
A P&L follows this structure:
- Revenue
- Cost of Sales
- Gross Profit
- Operating Expenses
- Operating Income
- Finance Costs
- Profit Before Tax (PBT)
- Tax
- Profit After Tax (PAT)
💰 Revenue (Turnover)
Revenue is the total income generated from business activities.
Example:
- A hotel → room bookings
- A bank → interest income
💡 High revenue does not necessarily mean high profit.
🏭 Cost of Sales
These are the direct costs required to generate revenue.
Examples:
- Raw materials
- Staff directly tied to production
📈 Gross Profit
Gross Profit = Revenue − Cost of Sales
This shows how profitable core operations are before overhead costs.
📊 Gross Margin
Gross Margin = Gross Profit / Revenue
Higher margin = more efficient business.
🏢 Operating Expenses
These are indirect costs such as:
- Salaries
- Marketing
- Administration
📊 Operating Income (Operating Profit)
Operating Income = Gross Profit − Operating Expenses
This shows profit from core business operations.
📊 Operating Margin
Operating Margin = Operating Income / Revenue
Important for comparing companies.
💸 Finance Costs
Costs related to debt:
- Interest payments
Companies with high debt will have higher finance costs.
📉 Profit Before Tax (PBT)
Profit after operating income and finance costs, but before tax.
Useful for comparing companies across different tax regimes.
📊 Tax
Taxes paid on profits.
💰 Profit After Tax (PAT)
Also known as net income.
This is the final profit available to shareholders.
📈 Earnings Per Share (EPS)
EPS = Net Income / Shares Outstanding
EPS shows how much profit is allocated per share.
It is a key input for:
🧠 How to Analyse a P&L
Look for:
- Revenue growth over time
- Stable or improving margins
- Consistent profitability
Avoid:
- Falling margins
- Erratic earnings
🏦 Special Case: Banks & Insurance
Financial institutions have different structures.
Instead of revenue, they may show:
- Net interest income
- Premium income
Learn more:
Banks & Insurance Guide
⚠️ Common Mistakes
- Looking only at revenue
- Ignoring margins
- Not checking consistency over time
- Comparing companies across unrelated industries
💡 Profit quality matters more than just profit size.
🔗 Related Guides
⬅️ Previous:
8. Order Book
➡️ Next:
10. Balance Sheet