Why should investors pay attention to the Profit and Loss Statement and how to use it

If you are looking for a way to assess a company’s financial health, the profit and loss statement is the tool you need. This document is like an audit report that shows how much money the company earns and how much it spends. The “audit” result is either profit or loss. Investors, business owners, and managers are not just interested in the Profit and Loss Statement or P&L by coincidence, but because it reveals truly important information.

What is a Profit and Loss Statement and Why Is It Important for Investing

Profit and Loss Statement or P&L is a summary of operational figures over a specified period. It shows where the company’s revenue comes from, where the money is spent, and how much remains. It’s similar to calculating your own income and expenses each month.

For investors, this type of statement tells a story more important than just the ability to generate profit. It shows how well the company can turn revenue into actual profit and helps decide whether to invest or not.

( How to Calculate Profit and Loss Simply

Total Revenue )Total Revenue### − Total Expenses (Total Expenses) = Profit or Loss (Profit or Loss)

• Total Revenue = Money coming in from sales of goods/services
• Total Expenses = Money going out, including raw materials, salaries, rent, advertising, etc.
• Result = If revenue exceeds expenses, it’s a profit; if less, it’s a loss

Structure of the Profit and Loss Statement - What Each Layer of Profit Tells You

When calculating the profit and loss statement, it’s not simply subtracting everything from the start to the end. Instead, expenses are deducted layer by layer to reveal the profit-building pattern of the business.

Gross Profit (Gross Profit) = Revenue from sales − Cost of goods sold

This indicates how much remains after deducting production or procurement costs. It helps assess how much the company can set prices above costs.

Operating Profit or EBIT (Operating Profit or EBIT) = Gross Profit − General Expenses (Selling, Administrative Expenses, etc.)

This metric shows the efficiency of managing the core business. A high operating profit means the business itself is profitable.

Net Income (Net Income) = Total Revenue − Total Expenses (Including interest, taxes, etc.)

This is the “real” money the business has left after all deductions. It’s clear that net income is the number investors care about most.

( Example of Actual Profit and Loss Statement Calculation