Investors need to know: What does the (P&L) tell us about the business?

When it comes to investing, many people tend to focus on stock prices or chart trends. But in fact, the Profit and Loss Statement(Profit and Loss Statement) is an invaluable document. This document is considered a “health indicator” of a business because it reveals the truth about how much money the company is making and where the money is being spent.

What is a Profit and Loss Statement?

Profit and Loss Statement is a financial document that shows the events occurring within a specified period, presenting figures related to revenue earned, expenses incurred, and the final result indicating whether the business is profitable or at a loss.

For investors, this document is important because it helps answer key questions such as:

• Where does the company generate its revenue?
• How much expenses are deducted from the revenue?
• What is the actual profit remaining?

Basic Formula: Simple but Powerful

Calculating P&L is not as complicated as you might think:

Total Revenue - Total Expenses = Profit (or Loss)

Meaning of each part:

• Total Revenue (Total Revenue): Cash collected from selling goods or services
• Total Expenses (Total Expenses): Money spent to keep the business running, such as rent, advertising, salaries
• Profit or Loss: The difference between these two figures. If revenue exceeds expenses, it’s a profit; if expenses are higher, it’s a loss.

Full Structure of the Profit and Loss Statement

When viewing an actual P&L, you will see figures like this:

What does Gross Profit tell us?

Gross Profit = Direct revenue minus direct cost of goods sold

This figure indicates how much the company can price its products above the production cost. A high Gross Profit shows the company has pricing power in the market.

For example, if the Gross Profit Margin (Gross Profit divided by Revenue) is 60%, it means every dollar of sales yields 60 cents of gross profit before other expenses.

What can different profit levels reveal?

1. Gross Profit(

Shows whether the company is efficient in production and pricing.

) 2. Operating Profit### Indicates whether the core management of the business is profitable, excluding financial expenses and taxes.

( 3. Net Income) The bottom line: after all deductions, how much actual profit remains?

Components of the P&L in detail

Revenue

• Operating Revenue (Operating Revenue): From sales of main products or services
• Other Revenue ###Other Revenue(: Interest, rent, fees, etc.

) Expenses

• Cost of Goods Sold (Cost of Goods Sold): Raw materials, wages, manufacturing costs
• Selling Expenses ###Selling Expenses(: Advertising, marketing, transportation, commissions
• Administrative Expenses )Administrative Expenses(: Salaries of management, office costs
• Financial Costs )Financial Cost(: Interest paid, foreign exchange losses
• Taxes: Other expenses

How to read and analyze a profit and loss statement

) Step 1: Check the period P&L statements are usually prepared monthly, quarterly, or annually. The first thing to look at is the period to avoid comparing different timeframes.

( Step 2: Look at overall revenue vs. expenses This is the starting point to understand financial health. Is profit increasing or decreasing? Which direction is it heading?

) Step 3: Analyze revenue sources Is revenue coming from a single product or diversified across multiple sources? Diversification reduces risk.

Step 4: Assess expense feasibility

Which expenses are the largest? When do they increase? Good expense control reflects strong management.

Comparison formats: Report Form vs. Account Form

The P&L can be presented in two formats:

1. Report Form### (Narrative)

Organized into sections from revenue → expenses → net profit, easy to understand and read.

Advantages:

• Easy to understand, tells a story
• Clear overall picture
• Suitable for analysis similar to Account Form

2. Account Form### (T-Account)

Displays in a T-shape, with expenses on the left () and revenue on the right ###, with totals matching.

Advantages:

• Complete and clear, well-categorized
• Easy to prepare, with a fixed principle
• Accepted by government agencies

Why is the profit and loss statement important for investors?

( 1. Measures the true efficiency of the business Stock prices can fluctuate, but the P&L reveals the real picture: Is the company profitable?

) 2. Checks sustainability Does profit come from core business or just one-time events? Companies with consistent profits are more likely to grow sustainably.

( 3. Compares with competitors You can directly compare the P&L of Company A with B to see who is more profitable.

) 4. Assesses fair stock valuation Using Net Income, you can calculate P/E ratio and other metrics to determine if the stock is overvalued or undervalued.

( 5. Strategic planning If expenses spike, adjustments may be needed; if revenue drops, new revenue channels might be sought.

Real-world analysis example

Imagine Company X with:

• Revenue of 100 million Baht
• Cost of Goods Sold of 40 million Baht → Gross Profit = 60 million
• Other expenses of 35 million Baht → Operating Profit = 25 million
• Tax of 5 million Baht → Net Income = 20 million

In this case:

• Gross Profit Margin = 60%: Good, indicates pricing power
• Operating Margin = 25%: Moderate, management is doing okay
• Net Margin = 20%: Normal, healthy for growth

What to check when reviewing a P&L

• ✓ Has revenue increased compared to last year?
• ✓ Are expenses rising faster than revenue?
• ✓ Is Gross Profit Margin stable or volatile?
• ✓ Are there extraordinary or one-time expenses?
• ✓ Is Net Income consistently positive?

Summary

The Profit and Loss Statement )Profit and Loss Statement### is not just a sheet of numbers; it is the “heart” of investment analysis. When you understand what Gross Profit is, how Operating Profit differs from Net Income, and what each figure reveals about the business, you can make more informed and rational investment decisions.

However, don’t rely solely on the P&L. Also review the Balance Sheet, Cash Flow Statement, and other business factors. Management team, technology, market conditions—all are equally important for making sound investment choices.