The income statement is the report that starts with everything a company sold and subtracts, one layer at a time, until only the final profit is left. Reading it is simply following that journey downwards.
Start with revenue
Revenue — also called sales or the 'top line' — is the total value of goods or services sold during the period, before any costs are removed. A company that sells ₹1,200 crore of products has revenue of ₹1,200 crore.
Subtract the direct cost of what was sold
Cost of goods sold (for a manufacturer) or cost of services (for a service business) is the direct cost of producing what was sold: raw materials, wages on the factory floor, and similar. Remove it and you reach gross profit.
Gross profit = Revenue − Cost of goods / services
Subtract the operating costs
Running the business costs money beyond making the product. Subtract these operating expenses and you arrive at EBITDA.
- Salaries of office staff and managers
- Rent, electricity and administration
- Marketing and advertising
- Research and development
Build an income statement
Change any input and watch the whole statement — and every margin — recalculate.
| Line item | ₹ crore |
|---|---|
| Revenue | 1,000 |
| Cost of goods / services | -400 |
| Gross profitRevenue − COGS | 600 |
| Operating expenses | -200 |
| EBITDAGross profit − Opex | 400 |
| Depreciation & amortisation | -100 |
| EBIT (operating profit)EBITDA − D&A | 300 |
| Interest | -50 |
| Profit before tax | 250 |
| Tax @ 25% | -62.5 |
| Net profit | 187.5 |
Gross margin
60%
EBITDA margin
40%
Operating margin
30%
Net margin
18.8%
Below EBITDA the statement continues: depreciation and amortisation bring you to EBIT (operating profit), then interest on borrowings, then tax, and finally net profit — the bottom line belonging to shareholders.
- Net profit
- What remains after every cost, including interest and tax — the 'bottom line'.
- EPS (earnings per share)
- Net profit ÷ number of shares — the same profit expressed per share.