A profit and loss report, also known as an income statement, is a financial document created to show an organization’s profit or loss for a specific time period. It contains a list of the organization’s total revenues and expenses. The difference between these two amounts represents the amount of profit or loss. When a profit and loss report is analyzed, you begin by first understanding the components contained in the financial report.
Acquire a current profit and loss report. Study the heading on the report to find out the time period. Profit and loss reports are created monthly, quarterly or annually by many companies. Financial statements that include these reports are available through the Securities and Exchange Commission (SEC) for all publically traded companies.
Review the amounts on the statement. The first item to analyze is the bottom line. The bottom figure on a profit and loss statement reflects the amount the company gained or lost. If the amount is a positive number, it is a profit. If the amount is negative, listed in red or in parentheses, the amount reflects a loss.
Study the revenues and expenses. After discovering whether or not the company made a profit, review the amounts listed as revenues and expenses. Determine if the company made money from normal operations or if a large profit was due to a sale of a fixed asset. Another item to look at when analyzing this statement is the amount of depreciation. Depreciation is an allowable expense that does not actually reflect a payment of money. A loss on this type of statement may be due to large amounts of depreciation expenses.
Compare the information. Gather a profit and loss statement from a different period, of equal time, or from a different company within the same industry. Compare the amounts of revenues and expenses, looking for things that stand out such as the examples in the above step.
Calculate the company’s profit margin ratio. Ratios are often used when performing financial statement analysis. To calculate this ratio, divide the net income before taxes by the total sales amount. The answer to this ratio tells the rate of profit the company earned for every sales dollar received. Calculate this ratio for prior profit and loss statements and determine if the company is improving or not.