OPERATIONS ANALYSIS

HOW WE CAN READ AN INCOME STATEMENT

HOW WE CAN READ AN INCOME STATEMENT

Income Statement, called also Profit & Loss

Statement (P&L) is a summary of revenue earned
and expenses incurred which ultimately results in
profit to the company or loss
 REVENUES

Revenues (or Sales)

Revenue = Price x Quantity

It is the amount of money a company makes from the

sale of products and services (revenue from the main
activity)

Tip for analysis: Revenues can be broken down to show

the rate of growth in volumes and prices, with trends
being compared with growth rates in the market or the
sector;
 NET REVENUES

Net Revenues

It is the revenues minus any revenues related expenses

such as:

- Sales Returns
- Discount

Some companies show directly net revenues on their

income statement
 COST OF GOOD SOLD

Cost of Good Sold

The direct costs associated with the production of goods

sold by the company

Beginning Inventory + Inventory Purchases

Goods Available for sale

- Ending Inventory

= Cost of Goods Sold

 EXAMPLE

Example:

Company ‘‘Nice’’ sells shoes.

In 2008, it had an inventory of $1 000. During the FY

2009, it bought 20 units of shoes for $15 a piece. Its
ending inventory is $900.

Calculate the COGS?

 GROSS PROFIT

Gross Profit:

What the company makes as a profit after deducting

COGS from net revenues

= Net revenues – COGS

 INVENTORY VALUATION

The problem with inventory is that you do not know

exactly what units were sold: the first units purchased or
the last ones. For that reason, we have three main
methods for inventory valuation:

LIFO: Last In First Out

FIFO: First in First Out

Average Cost
 FIFO METHOD

Source: Prentice Hall, 2009

 FIFO METHOD

Source: Prentice Hall, 2009

 LIFO METHOD

Source: Prentice Hall, 2009

 AVERAGE COST METHOD

Source: Prentice Hall, 2009

INVENTORY METHODS IN PRACTICE
COMPARAISON
 OPERATING EXPENSES

There are also referred to as ‘‘Selling, General &

Administrative Expenses’’

Items commonly included in the operating expenses are

not directly attributable to production.

Examples of operating expenses:

- employee salaries,
- bonuses
- marketing costs,
- insurance,
-…
 OPERATING PROFIT

It shows you how your basic business or core business

is doing.

Gross Profit

- Operating Expenses

= Operating Profit

It is sometimes used as a synonym for EBIT (Earnings

Before Interest & Tax).

There may be a slight difference between EBIT and

operating profit (non operating income added)
 EBITDA

It stands for earnings before interest, tax, depreciation

and amortization

You can add back depreciation & amortization for EBIT

to get to EBITDA

EBIT + Depreciation & Amortization = EBITDA

 NET INCOME

It is the last item you have on the income statement

It is also called net profit or net earnings

Companies after making net income, they

* retain some income as a reserve for reinvestment –

retained earnings-

* and distribute dividends

 SOME KEY RATIOS

• OPERATING PROFIT MARGIN

The operating profit margin tells you how much operating

profit a company makes for every $1 it generates in revenue
or sales

Operating profit margins vary by industry: the higher a

company's margin compared to its competitors, the better.

Operating Profit Margin Ratio = Operating Profit/Sales

 SOME KEY RATIOS

• NET PROFIT MARGIN

The profit margin tells you how much profit a company

makes for every $1 it generates in revenue or sales

Net Profit Margin Ratio = Net Income/Sales

 SOME KEY RATIOS

• EBITDA MARGIN

EBITDA: earnings before interest, taxes, depreciation,

and amortization.

Depreciation = non-cash expense of the wear and tear

on fixed assets based on the respective useful lives

Amortization = non-cash expense of writing off

intangible assets over their useful lives.

= EBITDA/Sales