How to Read a P/L Statement? By the end of this article you will know how to read a P&L Statement and what it means for company operations.
Welcome to the next part in my What is a stock Series. In this section we will be talking about how to read a P&L Statement. For this example we will be looking at the quarterly profit and loss statement of Apple Inc (ticker: AAPL).
While we will be looking at a statement from Apple the format applies to all stocks. Some Stocks may have more or fewer line items depending on the business and how they choose to report their income. Note that the numbers will be in Millions unless otherwise noted.
How to read a P/L Statement Sales Revenue
At the top where you see arrow #1 next to the P&L Statement you will see three lines. The top most line being revenue. This is the total amount of all sales of all the products and services. You can also say this is all of the money that came into the company by selling its goods or services.
The top of each column shows the date when the numbers were compiled. In this case the left column is December 29, 2018 and the right column is December 30, 2017. This is done so you can see the difference in the financials year over year. You can think of this as your paycheck if you would like.
Below the revenue line of the profit and loss statement you see the cost of sales. This includes the money paid to its contract manufacturers, developers, and so on and so forth. This is not an all inclusive number. It only includes the materials, labor, and tooling necessary to make the products being sold. You can think of this as the bills you have to pay, for example your mortgage, car payment, or insurance.
The next line is gross margin. This line is very simple, it is simply revenue minus the cost of goods sold. While the line is very simple it is also very important. The gross profit is the money that is left over to pay other expenses, give money back to shareholders, and invest in the future. If you want this to make more sense think of your paycheck, subtract your mortgage, car payment and other expenses that are considered mandatory. This would be the money you have left over after paying your mandatory bills. Revenues and revenue growth mean a lot to a stock and how to read a p/l statement.
How to Read a P/L Statement: Expenses
The next step down moves into expenses that are not related to manufacturing the products that have been sold.
The first line next to arrow two is research and development. This is money that is spent to develop future products. In this case it would be the Iphone 11 and whatever else they are working. It can be a very opaque number because the general public does not really know were the money is going unless the company discloses future products (Apple does not).
Selling, general and administrative, SG&A, expenses generally covers everything else. SG&A covers accountants, printer paper, ink pens, sales people, and other expenses along those lines. The biggest thing to note in SG&A is how much it eats into the gross profit. Many companies that have a gross profit are unprofitable because their SG&A expenses greater than their gross profit. This is very important to understand how to read a P/L statement.
Total operating expenses are simply the SG&A expenses plus the research and development expenses. That being said I will move on to the operating income line. Operating income is the gross profit minus the total operating expenses. Imaging after you pay your bills you have some money left over. You spend some of that money one entertainment, eating out, or going to a concert. This is similar to the money you have left over after those more discretionary expenses.
OK, Take a minute to give your mind a break. I know if you are not familiar with these topics it can seem overwhelming but it is almost over.
The other income/(expense) line is the accumulation of small expenses or revenue that does not really fit in the prior categories. This is kind of like the change you find in your couch or the quarter you spend on candy for your kids.
Taxes and Other Stuff
Income before provision for taxes is simply profit or loss after everything is added up so far. We will move on to the provision for taxes. This is what the company expects to pay in taxes for the earnings of that quarter. It is as simple as the taxes that are taken from your paycheck every week.
Getting to the end, hang in there.
Net income is what is left after all of these numbers are added together after all the income and spending. This is the final total number that represents the amount of money a company had made or lost. That is it, but wait there is more.
Profit and Loss Statement Net Earnings
The per share information, Crap. To make this simpler I will skip to arrow number 4. Go ahead look, I will wait. The number of shares available. The basic number of shares are used as the number of shares that are available for trading. Diluted shares are the total number of shares that exist. There are several reasons that these numbers can be different and will not get into that now. In this case the number of shares are listed in thousands so add three zeros behind the number the get the actual number. You will notice that the number of shares dropped significantly in the last year.
Finally the last part. What some would call the most important part. Earnings per share. This is the net income divided by the number of shares. That is it. Now you know how to read a p/l statement.
Now if your brain is still functioning through this maybe you have noticed that the net income has gone down and the earnings per share have gone up. This is because of the share buyback program. The reduction in share count has been responsible for covering up the declining net income declines for a few years now. Take from that what you would like.How much does a P&L Statement mean to a companies stock price? Everything, it means everything.Thank You for reading Next Section Balance Sheets! Click Here to Read