Reading a company's income statement
The income statement is where a business shows what it earned and what it cost to earn it. This lesson reads it as margins, shows what sits below the profit line, and compares two real companies whose costs look nothing alike.
- Level
- Beginner
- Reading time
- About 24 minutes
- Know this first
- Introduction to financial statements
By the end you will be able to:
- work out gross, operating and net margins from an income statement
- explain the difference between expenses listed by nature and by function
- say what exceptional items, earnings per share and other comprehensive income are
- tell profit for the year from total comprehensive income in a real statement
The shape of an income statement
An income statement starts with what the business earned and subtracts, step by step, what it cost to earn it. Each subtraction stops at a subtotal, and each subtotal answers a different question. Revenue less the direct cost of what was sold is the gross profit. Less the cost of running the business is the operating profit. Less interest is the profit before tax, and less tax is the profit for the year.
The lesson on revenue, expenses and profit built this for a month in a small shop. This lesson goes further in three directions: reading each line as a share of revenue, understanding what sits below the profit line, and seeing how two real companies with very different businesses produce very different statements.
Move the numbers
Below is a small company's year. Change its revenue, the cost of its materials and its running costs. Interest is fixed at ₹30,000 and tax is 25% of any profit. The left column shows rupees. The right column shows the same lines per ₹100 of revenue, which is the way analysts compare companies of different sizes.
The company earned ₹1,27,500 after tax. That is ₹12.75 for each of its 10,000 shares. Of every ₹100 of revenue, ₹12.75 was left as profit.
Try three experiments. First, raise the materials share to 80% and see how quickly profit disappears: a business with thin margins is sensitive to its input costs. Second, cut revenue to ₹4,00,000 while leaving running costs alone, and watch profit turn into a loss. Running costs do not shrink when sales fall, which is why a quiet year hurts more than the lost sales alone suggest. Third, notice that interest and tax come after the operating lines. Two businesses with the same operating result can show different profit for the year if one has borrowed heavily.
Three margins
The same revenue figure gives three different measures of how well the business turns sales into profit, depending on where you stop.
| Margin | Worked out as | Question it answers | Starting position above |
|---|---|---|---|
| Gross margin | (Revenue − materials) ÷ revenue | Do the goods themselves earn a margin? | 40% |
| Operating margin | (Revenue − materials − running costs) ÷ revenue | Does the business work, before borrowing and tax? | 20% |
| Net margin | Profit for the year ÷ revenue | What share of sales does the owner keep? | 12.75% |
Margins do not compare across industries without care. A supermarket lives on a small margin and fast turnover. A software company has few materials and a high gross margin. Compare a company with its own past, and with firms that sell similar things, before drawing conclusions.
Two ways to list the costs
Meena's costs are grouped by what they are for: the goods, then the running of the shop. This is grouping by function. Indian company accounts group costs by nature instead: materials consumed, purchases of stock, employee benefits, finance costs, depreciation and other expenses, whatever part of the business they were spent in. Ind AS 1 allows either approach.
The result is that a company's own statement does not hand you its "cost of goods sold". You assemble it. In Titan's case the first three expense lines, materials, bought-in stock and the change in inventories, add up to the cost of goods. The lesson on revenue, expenses and profit shows the sum.
Two companies, two shapes
The next table sets two Indian companies side by side, with every line expressed as a share of revenue from operations for FY2023-24. Titan makes and sells jewellery and watches. Info Edge runs online businesses, including job and property listings. The same statement, laid out the same way, tells two very different stories.
| Share of revenue from operations | Titan | Info Edge |
|---|---|---|
| Materials, bought-in stock and change in inventories | 78.4 | none |
| Employee benefits | 3.2 | 41.2 |
| Advertising and promotion | 1.8 | 11.5 |
| Depreciation and amortisation | 0.9 | 2.8 |
| Finance costs | 1.0 | 0.7 |
| All other expenses | 6.0 | 7.1 |
| Other income, added back | 1.1 | 10.9 |
| Exceptional items | none | (0.7) |
| Profit before tax | 9.8 | 46.8 |
| Profit for the year | 7.5 | 35.0 |
Titan spends 78.4% of its revenue on materials and stock, which is the mark of a business that makes and sells goods. It spends 3.2% on people. Info Edge's statement has no materials or stock line at all. It spends 41.2% of revenue on employee benefits and 11.5% on advertising, which is the mark of a business made of people and marketing. Titan's profit for the year was 7.5% of revenue from operations, and Info Edge's was 35.0%.
That gap does not make one company better than the other. A jeweller that turns over its stock several times a year can earn a good return on a thin margin. What it shows is that a margin means little without knowing the business behind it. Both companies also include "other income" in their statements, such as interest on investments. For Titan it was ₹510 crore, which is 11% of profit before tax. For Info Edge it was ₹2,591.80 million, which is 23% of its profit before exceptional items and tax. A reader asking how well the core business performs should look at both the operating lines and the income from investments, separately.
Below the profit line
The income statement does not always end at profit for the year. Three kinds of line sit near the bottom, and each one trips up new readers.
Exceptional items
A gain or loss that is large or unusual enough that the company shows it on its own line, so readers can look past it. Info Edge's FY2022-23 statement has one of ₹2,947.45 million, against ₹171.44 million in FY2023-24. Without it, the FY2022-23 profit before tax would have been ₹9,106.79 million rather than ₹6,159.34 million. When a profit figure jumps or falls sharply, the first thing to check is whether a one-off line explains it.
Earnings per share
Profit for the year divided by the number of shares. It matters to a shareholder because it is the profit that belongs to each share they hold. Titan reported ₹39.94 a share for FY2023-24 against ₹37.54 a year earlier. Info Edge reported ₹64.57 against ₹31.91. EPS can rise or fall for reasons other than profit, such as a change in the number of shares, so read it beside the profit figure and not instead of it.
Other comprehensive income
Some gains and losses are recorded straight in equity and skip the profit line, because the accounting standards say they should. Together with profit they make total comprehensive income. For most companies the difference is small. For some it is enormous, as the next section shows.
When profit is not the whole result
Below is Info Edge's income statement in full, in the order the company prints it, in ₹ million. Read down to the profit for the year. Then keep reading, to the lines that follow it.
| ₹ million | FY2023-24 | FY2022-23 |
|---|---|---|
| Revenue from operations | 23,809.58 | 21,586.19 |
| Other income | 2,591.80 | 1,750.94 |
| Total income | 26,401.38 | 23,337.13 |
| Employee benefits expense | 9,820.90 | 9,087.10 |
| Finance costs | 163.11 | 38.89 |
| Depreciation and amortisation expense | 677.38 | 447.41 |
| Advertising and promotion cost | 2,743.95 | 3,155.39 |
| Network, internet and other direct charges | 496.04 | 450.97 |
| Administration and other expenses | 1,196.08 | 1,050.58 |
| Total expenses | 15,097.46 | 14,230.34 |
| Profit before exceptional items and tax | 11,303.92 | 9,106.79 |
| Exceptional items (loss) | (171.44) | (2,947.45) |
| Profit before tax | 11,132.48 | 6,159.34 |
| Current tax | 2,799.50 | 2,162.41 |
| Deferred tax charge or (credit) | 2.16 | (115.00) |
| Total tax | 2,801.66 | 2,047.41 |
| Profit for the year | 8,330.82 | 4,111.93 |
| Other comprehensive income | ||
| Remeasurement gain or (loss) on post-employment benefits | 3.29 | 18.49 |
| Gain or (loss) on financial assets measured at fair value through OCI | 157,101.44 | (37,731.15) |
| Income tax relating to this | (17,924.02) | 4,278.66 |
| Other comprehensive income for the year, net of tax | 139,180.71 | (33,434.00) |
| Total comprehensive income for the year | 147,511.53 | (29,322.07) |
| Earnings per share, basic (₹) | 64.57 | 31.91 |
The profit for the year was ₹8,330.82 million, or about ₹833 crore. Total comprehensive income was ₹147,511.53 million, about ₹14,751 crore, which is 17.7 times larger. The difference is a gain of ₹157,101.44 million on investments that Info Edge holds in other companies. Under Ind AS the company records those investments at fair value and puts the change in value in other comprehensive income instead of profit. In FY2022-23 the same line was a loss of ₹37,731.15 million, and total comprehensive income was a loss of ₹29,322.07 million even though the company made a profit of ₹4,111.93 million.
The gain is real in the sense that the investments are worth more. It is not cash, and it is not profit from running the business. Both facts matter, which is why the statement shows them separately. A reader who looked only at total comprehensive income would think the business earned ₹14,751 crore from its operations. A reader who looked only at profit would miss that the company's net worth moved by far more than its trading result. The lesson on the balance sheet shows the other side of this entry on the balance sheet.
Where the revenue goes
The income statement starts with revenue and takes away costs in layers. The table shows what share of revenue each layer takes at Apple, Microsoft and Toyota. The three list costs by their function, which means by the job they do, such as making the product or doing research, and not by their nature, such as wages or materials.
| Latest fiscal year, share of revenue | Cost of sales | Research and development | Selling and administrative | Operating margin |
|---|---|---|---|---|
| Apple | 53.1% | 8.3% | 6.6% | 32.0% |
| Microsoft | 31.2% | 11.5% | 11.7% | 45.6% |
| Toyota | 80.1% | not shown | 10.0% | 10.0% |
Apple and Microsoft spend similar amounts on research and development in dollars, $34,550 million and $32,488 million. Because Apple's revenue is bigger, that is a smaller share of its revenue. Microsoft's cost of sales is much lower relative to revenue, which is typical of a business whose main product is software and cloud services: producing one more copy costs very little compared with the cost of building the first. Toyota's cost of sales takes just over four-fifths of every yen, which is typical of making physical goods. Toyota's cost of sales includes the cost of its financial services as well as the cost of its vehicles, and the statement has no separate research line in the summary used here, so it is shown as not available.
Which part of revenue is growing
The total revenue growth rate can hide what drives it. All three companies report revenue in two parts, and the parts grew at very different rates:
| Revenue growth, latest year over prior | Products | Services (Toyota: financial services) | Total |
|---|---|---|---|
| Apple | 4.1% | 13.5% | 6.4% |
| Microsoft | −1.3% | 20.8% | 14.9% |
| Toyota | 4.7% | 28.7% | 6.5% |
At Apple, services grew 13.5% against 4.1% for products. At Microsoft, service and other revenue grew 20.8% while product revenue moved −1.3%. At Toyota, the financial services arm grew 28.7% against 4.7% for the sale of products. In each case the services side outgrew the product side. At Microsoft that side is already the larger part, so it carries the total up; at Apple and Toyota it is the smaller part, and its growth is diluted in the total. Where revenue is split, look at the parts before the total.
Profit per share, and why currency matters
Below net income, large listed companies report earnings per share, net income divided by the number of shares. Microsoft's net income of $101,832 million, divided by 7,465 million diluted shares, gives earnings per share of $13.64, against $11.80 a year earlier, an increase of 15.6% while net income rose 15.5%. "Diluted" means the count includes shares that could be created from employee awards and similar rights, which is the cautious way to count.
Toyota's earnings per share are ¥359.56, against ¥365.94. They are calculated on the profit that belongs to the parent company's shareholders, ¥4,765,086 million, which implies about 13.25 billion shares. Per-share figures answer a particular question, how much profit each share earned, and they cannot be compared across companies without also comparing share prices and currencies. A yen figure of 359.56 is not larger or smaller than a dollar figure of 13.64 in any meaningful sense.
Tax rates differ for a reason
The tax line on the income statement is the tax charged for the year, and the ratio of that charge to profit before tax is the effective tax rate. Apple's was 15.6% in its latest year and 24.1% the year before. Microsoft's was 17.6% and Toyota's was 25.3%. Companies with operations in many countries pay tax at the rates of each, and the mix of countries, tax credits and one-off items can change the rate noticeably from one year to the next. A swing like Apple's is a reason to read the tax note, which sets out the reasons for the difference between the rate that applies in the home country and the rate the company actually bore.
Common mistakes
Comparing net margins across industries
A 7% margin can be excellent for a retailer and poor for a software firm. Compare like with like.
Treating all profit as coming from the business
Other income, such as interest on investments, is part of profit before tax but is not earned by selling goods or services. Read it separately.
Ignoring one-off lines
An exceptional gain can lift one year's profit, and an exceptional loss can depress it. Ask what the profit would be without it, and whether it is likely to happen again.
Taking total comprehensive income for profit
They are different measures. Profit for the year is the earned result. Total comprehensive income adds gains and losses that skipped the profit line.
Reading expenses by nature as if they were by function
"Employee benefits" in an Indian income statement covers every employee, including those in selling and administration. It is not the same thing as "cost of sales".
Try it yourself
1. A company has revenue of ₹50 lakh, materials of ₹30 lakh and running costs of ₹12 lakh. Find its gross margin and its operating margin.
Show the working
Gross profit is ₹50 lakh − ₹30 lakh = ₹20 lakh, so gross margin is 20 ÷ 50 = 40%. Operating profit is ₹20 lakh − ₹12 lakh = ₹8 lakh, so operating margin is 8 ÷ 50 = 16%.
2. The same company pays ₹2 lakh of interest and tax at 25% of profit before tax. What is the profit for the year, and the net margin?
Show the working
Profit before tax is ₹8 lakh − ₹2 lakh = ₹6 lakh. Tax is 25% of ₹6 lakh = ₹1.5 lakh. Profit for the year is ₹4.5 lakh. Net margin is 4.5 ÷ 50 = 9%.
3. The company has 50,000 shares. What is its earnings per share?
Show the working
₹4,50,000 ÷ 50,000 shares = ₹9 a share.
4. Using the table above: Info Edge's profit for the year in FY2022-23 was ₹4,111.93 million, but its total comprehensive income was negative. What caused that?
Show the working
Other comprehensive income was a loss of ₹33,434.00 million, mainly a fall of ₹37,731.15 million in the value of its investments, partly offset by a tax credit of ₹4,278.66 million. Adding that loss to the profit gives a total comprehensive loss of ₹29,322.07 million.
Where this is used
- An analyst computes gross, operating and net margins for several years to see whether a company's profitability is improving.
- A lender looks at operating profit against interest to judge whether the business can pay what it owes.
- A founder reads a competitor's published margins to see where its own costs sit against the industry.
- An investor looks at earnings per share and its growth over several years, and checks whether one-off lines are doing the work.
Key terms
- Gross profit
- Revenue less the direct cost of what was sold.
- Operating profit
- Profit from running the business, before interest and tax.
- Profit before tax
- Profit after all costs including interest, before income tax.
- Margin
- A profit measure divided by revenue, quoted as a percentage.
- Exceptional item
- A large or unusual gain or loss shown on its own line.
- Earnings per share
- Profit for the year divided by the number of shares.
- Other comprehensive income
- Gains and losses recorded directly in equity and not in profit for the year.
- Total comprehensive income
- Profit for the year plus other comprehensive income.
Questions people ask
Is a higher margin always better?
Not by itself. A high margin on few sales can earn less than a low margin on many. Margin shows profit per rupee of sales, and the other half of the story is how many rupees of sales there are.
What is the difference between profit for the year and net profit?
In everyday use they mean the same thing, the bottom line after all costs and tax. Indian income statements call it "profit for the year".
Why do some statements show a loss on one line and a gain on another?
The income statement mixes many kinds of events. A loss on selling an old machine can sit beside a gain on an investment. The subtotal is what counts, but the separate lines tell you which parts of the business drove it.
Does EPS tell me whether a share is cheap?
EPS is one input. Whether a share is cheap depends on its price against its earnings and its growth, which is a topic for the valuation lessons later in the course. This lesson only explains how the number is built.
Sources and review
- Info Edge (India) Limited, audited standalone financial statements, Q4 FY24. Source of the statement of profit and loss, including other comprehensive income and earnings per share.
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of the profit and loss figures and earnings per share.
- Institute of Chartered Accountants of India, Ind AS 1, Presentation of Financial Statements (lecture slides), for the presentation of expenses by nature and the definition of other comprehensive income.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
How the numbers were checked: both companies' statements were rebuilt from the printed lines, and every subtotal, including profit before tax, profit for the year and total comprehensive income, matches the filing. The calculator was tested against separate arithmetic on thousands of combinations of its sliders.