Reading the Income Statement

Written By Ethan Yan

What is an Income Statement?

The Income Statement is one of the four primary financial statements, where it summarizes a company’s revenues and expenses over a specified accounting period. It’s also called the profit and loss statement (P&L), where it provides insight to the company’s operations, expenses, revenue, and overall performance. The most important formula to remember here is:

Net Income = Revenue - Expenses

Income Statement Segments

The look of an income statement can vary and may even include unique parts depending on the regulation, size, and operating activities the company takes on. However, they generally display these components:

  1. Revenue: The amount of money a business takes in during a reporting period.

  2. Cost of Goods Sold (COGS): The cost of parts to make what the business sells.

  3. Gross Profit: Total Revenue minus COGS

  4. Operating Expenses: The costs required to run the business during a reporting period.

  5. Operating Income (EBIT): Profit from core operations only; after wages, depreciation, and COGs are deducted.

  6. Non-Operating Income: Profit from outside a company’s main business operations.

  7. Non-Operating Expenses: An expense not related to the company’s core business operations.

  8. Earnings Before Taxes (EBT): The profit after subtracting all expenses from revenue, excluding taxes.

  9. Income Tax Expense: The total amount of taxes a business owes.

  10. Net Income: Profit after deducting all expenses and taxes from the revenue.

  11. Earnings Per Share (EPS): The estimated metric of company value or its stock.

  12. EBITDA: The underlying profitability of a business.

The chart above is a quick and rough understanding of each segment, but understanding their purpose and what they mean is also extremely important.

Total Revenue

The revenue is the amount of money a company made from their core operations; excluding any expenses, during the specified period. This is typically displayed at the top of the income statement, whereas the Net Income, or profit, is displayed at the bottom of the statement.

Cost of Goods Sold (COGS)

The direct costs of components of purchasing or manufacturing products a business sells is the Costs of Goods Sold. It excludes indirect expenses, like the distribution costs. Distribution cost is all expenses a business realizes to move a finished product from one place to the customer.

Gross Profit

The money that remains after subtracting the total Cost of Goods Sold from the Total Revenue. It’s a great measure for efficiency on their production and sale of goods and services, since it excludes other fixed costs and focuses on just the core business operations.

Operating Expenses (OpEx)

Operating Expenses are the costs required to run its normal business operations. Typically it includes equipment, insurance, inventory costs, marketing, payroll, and R&D to name a few. The main objective this segment displays is how a company can effectively manage their operating expenses to gain competitive advantages and increase their profits.

Operating Income

The amount of profit after operating expenses, depreciation, and cost of goods sold. It’s also called Earnings Before Interest and Taxes (EBIT), since the number excludes taxes and interest that can skew the number. The number is best to calculate how much money the company will profit and to analyze if it’s generating more revenue while controlling its expenses.

Non-Operating Expenses

Non-operating expenses are business expenses that are not related to the core business operations. This includes interest expense and loss on asset sales. Other expenses that fall in this category are one-off legal expenses or asset write-downs, as they don’t normally happen in the company’s day-to-day business operations. The reason this isn’t included in operating income is because it can understate the true financial performance.

Non-Operating Income and EBIT

Similar to non-operating expenses, the increase in income that comes from outside the main business operations. This includes investment profits and asset sales. Items that fall in this category are dividend income, or profit/losses from investments to name a few. The reason this isn’t included in operating income is because it may overstate the true financial performance.

If you know about Earning Before Interest and Taxes (EBIT), you may wonder why it’s not technically included in the Income Statement. EBIT is referred to as Operating Income, but the Operating Income won’t always include non-operating income when there is a gain or loss. It’s also because it’s not in the Generally Accepted Accounting Principles (GAAP). However, EBIT is simply the profit that also includes non-operating income, but not the non-operating interest expenses.

Earnings Before Taxes (EBT)

Earnings Before Taxes is also referred to as income before income taxes, profit before tax, or pretax income. Regardless, it’s the amount of profit after subtracting the non-operating interest expenses from EBIT or the Operating Income. This number is best used as a comparison metric to other companies with differing tax rates. Think of corporations that are taxed at a federal level and will be different from tax rates from a state level. Since they all vary, if an analyst wants to compare one company to another, the EBT provides a better insight for performance.

Income Tax Expense

The amount of taxes a business owes based on its taxable income for a specific period, which is correlated to the company’s profitability and regulations. This item helps analysts in how the company tackles tax obligations and tax planning, which can indicate a healthy long-term financial performance. It is also a key component for the Net Income and Earnings Per Share (EPS).

Net Income

Net Income is also called the bottom line, since it’s at the very bottom of the income statement. It is the profit earned after all expenses and taxes have been deducted from the revenue. Great indicator to see the business’s health and trends, but nothing is guaranteed to be a true answer when it’s negative (if it’s going to fail).

Earnings Per Share (EPS)

The EPS is a metric that estimates the value of a company or its stock. They determine this number by:

EPS =
Net Income - Preferred Dividends
Weighted Average # of Shares Outstanding

Preferred Dividends is the obligation a company has to pay for preferred stockholders before common stockholders. Weighted Average # of Shares Outstanding is the number of shares outstanding over the reporting period, that is adjusted for stock splits or issuances. This item is typically used to monitor changes in profitability over time, or a comparison metric of other companies in the same industry.

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITA) is an unofficial performance metric that is commonly used to compare financial performance across companies. The reason it’s unofficial is because the GAAP doesn’t recognize it since it can overstate profitability. The main focus of this item is to track the underlying profitability of a company, regardless of financing choices and depreciation.

Real Life Example

I’m a hands-on person, so I remember something best when I actually apply it to a real-life scenario. In this case, I want to look at Walmart’s Fiscal Years Ended January 31, 2022 to 2024 Income Statement. You can also click this to see the official document.

  • We can see that the Total Revenues is calculated from their Net Sales, Memberships, and other sources of income. We mentioned that it’s great to see how a company is performing with their core business operations, which in this case we can calculate their year-over-year revenue growth. We can see a positive growth from 2022 to 2023 with a 6.30% increase. From 2023 to 2024, we saw a 5.68% increase, meaning the core business operations of Walmart are performing quite well.

  • Unfortunately the statement doesn’t display the gross profit, but it’s super easy to calculate regardless. We can take the Total Revenues of each year and subtract the Cost of Sales from it to form the Gross Profit. In this case, we’d have 2022: $143,754, 2023: $147,568, 2024: $157,983. We can also calculate the percent growth of Gross Profit: from 2022 to 2023 is 2.58% and 2023 to 2024 is 7.06%. The gross profit basically doubled the percent from the previous year, showing that their sales increased while their COGS stayed relatively the same.


  • We learned this earlier that EBIT is the same as Operating Income IF the interest and other non-operating items are listed below the Operating Income. This applies to this income statement, so the EBIT is listed as:

      [  2022: $25,942;    2023: $20,428;    2024: $27,012  ]

  • So we can see that the items below Operating Income are all non-operating items. This means they occurred outside of the core business operations. Non-Operating Expenses are: Debt, Finance Lease, Loss on extinguishment of Debt, Other (gains) and losses – which only applies since this number is a positive in this section. Non-Operating Income is: Interest Income since it’s a negative number, meaning it’s reducing the overall interest Walmart owes.

  • Mentioned before that they’re also called Income Before Taxes, so that’s what Walmart is calling it. We can calculate a year-over-year as well, but we can see that in 2023 it dropped down by (9.87%), which can indicate that the non-operating expenses increased more than operating income. However, if we look at just the operating income, we can see that it also decreased from 2022 to 2023, meaning that COGS and Operating Expenses also played a factor in the decrease of Operating Income and EBT.

    COGS + 7.49%

    OPEX + 7.34%

    Debt + 6.32%

    Finance Leas. + 6.16%

    Int. Income + 37.80%

    Loss on Ex. + 0%

    Other Loss + -95.06%

    Taking a look at the math, we can see that the expenses and cost of goods sold increased significantly. Even if interest income increased to reduce the expenses, while also having no losses on extinguishment of debt, and another decrease in other losses, it still wasn’t enough compared to the expenses. So we can say confidently that the expenses and COGS outweighed the gains, which caused a decrease in EBT from 2022 to 2023.

  • What’s truly interesting about the Provision for Income Taxes is the increase from 2022 to 2023, followed by a small decrease from 2023 to 2024. Despite their Operating Income and EBT decreasing from 2022 to 2023, Walmart likely experienced an increase in tax rates due to changes in tax benefits or tax credits. The same could be applied in 2023 to 2024.

  • There are two Net Incomes the statement outputs. Consolidated Net Income provides a metric best used as an overall economic performance indicator. It can be used to analyze all of Walmart’s profitability or operation scale.

    The Consolidated Net Income to Walmart is closer to what we mentioned in Net Income before. It takes into consideration other net income losses from noncontrolling interest, which can overvalue or undervalue the performance of the business. However, this is a new line that we didn’t cover in the learning section. The best way to understand this is a Parent Company and Sub Company.

    • Let’s say Ethan Company is the parent company to Yan Co. In this case, Ethan Company owns 30% of Yan Co., so whenever Yan Co. generates their Income Statement, they have to give 30% of their Net Income to Ethan Company.

    Technically in Walmart’s case, it’s not just about the parent company, but any stakeholder that needs to be paid is included in this item. Regardless, the number it produces is very important for investors as it is used to calculate the EPS, meaning it gives a good performance indicator of how Walmart is doing after taking into consideration their subsidiaries.

  • You’ll notice that there are two EPS: Basic and Diluted. Diluted is simply compensating for all potential share conversions that affect profitability. This means it’s equal to or less than Basic EPS, as it adds more shares into their calculation. However in this case, the EPS in 2024 has increased quite significantly, even greater than what it was in 2022. The diluted EPS is only a cent short from the basic, meaning it seems like the value of Walmart is fairly strong.

The Bottom Line

Isn’t it cool that we end each blog with “The Bottom Line”, now knowing that the Net Income is also called the Bottom Line. Anyway, we can have a good grasp on how to read an Income Statement and what each section means and what we can infer about the items in the statement. You’ll notice that I didn’t cover EBITDA in the example and that’s because it’s an unofficial term and requires some more calculation that I don’t have time on. However, I’ll likely make another blog about EBITDA alone, so keep an eye out for that. Be sure to look it up on my blog to see if I’ve posted it, if not, you can always look up what it is!

Ethan Yan