How to Read an Income Statement

!

This guide is part of our [Financial Statements course](/learn/track/financial-statements).

The income statement (also called the profit and loss, or P&L) shows how much money a company made and spent over a period — a quarter or a year. It answers the question every investor starts with: is this business actually profitable, and is that profit getting better or worse?

It reads top to bottom like a funnel: start with sales at the top, subtract costs at each stage, and arrive at profit at the bottom. This guide walks down that funnel and shows you the margins that separate a great business from a mediocre one.

The funnel: from revenue to profit

Each line subtracts a layer of cost from the one above it.

Line	What it is
Revenue (turnover)	Total sales — the "top line"
− Cost of goods sold	The direct cost of producing what was sold
= Gross profit	What's left to cover everything else
− Operating expenses	Wages, marketing, admin, R&D
= Operating profit (EBIT)	Profit from the core business
− Interest and tax	Cost of debt and the taxman's share
= Net income	The "bottom line" — profit for shareholders

!

The most important habit: don't just look at the bottom line. A company can grow net income by cutting costs or through one-off gains while its actual sales shrink. Follow the whole funnel.

Revenue — the top line

Revenue is the total value of goods and services sold. The first thing to check is the trend: is it growing, flat, or falling, and is that growth organic (selling more) or acquired (buying other companies)? Consistent organic revenue growth is one of the hardest things for a business to fake.

Gross profit and gross margin

Gross profit is revenue minus the direct cost of what was sold. Expressed as a percentage of revenue, it becomes the gross margin — a powerful signal of pricing power. A company that can charge far more than its products cost to make (think luxury brands or software) has a wide gross margin and, often, a durable competitive advantage.

Operating profit and operating margin

Subtract the running costs of the business — salaries, marketing, research — and you get operating profit, or EBIT (earnings before interest and tax). As a percentage of revenue this is the operating margin, the cleanest measure of how efficiently the core business turns sales into profit before financing and tax distort the picture.

You'll also see EBITDA quoted often — operating profit with depreciation and amortisation added back. It's useful for comparing companies, but be wary: it flatters businesses that spend heavily on equipment.

Net income and earnings per share

After interest and tax, you reach net income — the profit that belongs to shareholders. Divide it by the number of shares and you get earnings per share (EPS), the figure that drives the most-quoted valuation measure of all, the price-to-earnings ratio.

!

Beware "adjusted" or "underlying" earnings. Companies often present a flattering figure that excludes costs they'd rather you ignore. Always compare it to the statutory (official) number and ask why they differ.

Once you have EPS and a share price, our P/E ratio calculator turns them into a valuation multiple instantly.

The three margins, side by side

Reading margins over several years tells you more than any single year's profit:

Gross margin — pricing power and product economics
Operating margin — efficiency of the core business
Net margin — what finally reaches shareholders after everything

Rising margins usually signal a strengthening business; falling margins are an early warning that costs or competition are biting. See profit margin for how to interpret them together.

How the income statement connects to the other statements

Profit here isn't the same as cash — a sale booked as revenue may not be paid for months. That gap is why you must read the cash flow statement alongside it. And the profit a company keeps flows into equity on the balance sheet. One statement never tells the whole story.

See any company's income statement on Openbook

Openbook lays out revenue, margins and EPS for every UK-listed company over multiple years, so you can spot the trend at a glance instead of digging through annual reports — with a Profitability score that summarises margin quality.

Check the numbers for Diageo, GSK, BP or Unilever.

Start free with openbook (no card) →

Related Pages

This page is for informational purposes only and is not financial advice.

Frequently asked

Common questions

What is an income statement?

An income statement (or profit and loss statement) shows a company's revenue, costs and profit over a period such as a quarter or a year. It reveals whether the business is profitable and how that profitability is changing over time.

What is the difference between revenue and profit?

Revenue is the total value of sales — the top line. Profit is what remains after subtracting costs. A company can have large revenue but little or no profit if its costs are high, which is why you follow the whole income statement, not just the top or bottom line.

What is the difference between gross, operating and net profit?

Gross profit is revenue minus the direct cost of goods sold. Operating profit subtracts running costs like wages and marketing. Net profit is what's left after interest and tax. Each is a stricter measure of profitability than the one above it.

What is EPS on an income statement?

Earnings per share (EPS) is net income divided by the number of shares outstanding. It shows the profit attributable to each share and is the basis for the price-to-earnings (P/E) ratio.

Why is adjusted profit different from statutory profit?

Statutory profit follows accounting standards and includes all costs. Adjusted (or underlying) profit is a company's own figure that strips out items it considers one-off, such as restructuring charges. Adjusted figures can be reasonable, but always compare them to statutory profit and understand what's been excluded. ---