What Do Income Statements Tell You About a Company?

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A company's profit is equal to its income less expenses.
A company's profit is equal to its income less expenses. (Image: Jupiterimages/Photos.com/Getty Images)

There are millions of companies in the United States, some more successful than others. One of the most useful ways for a company to evaluate its success is to determine how much profit it has generated through its operations. An income statement can be an important indicator of a company's profitability.

Income Statement

Income statements, which are sometimes referred to as profit and loss statements, show the profits of a business during a specified time frame. A standard income statement contains a company's revenues, expenses, gains and losses, however, it does not show how much money the company receives in the form of cash receipts or the amount of money that the company pays out in cash disbursements. A company's revenue is usually equal to the value of its sales of goods and services.

Profit

When a company's expenses are subtracted from its revenue, the remaining figure is the company's total profits. If a company is making a fair amount of profit, this can be a signal for management to increase productivity and/or the availability of its goods and services. Conversely, if a company is not making a sufficient amount of profit, it may be time to reevaluate its current business strategy, and reduce or even eliminate certain expenses.

Financing

The overall profitability of a business is also important to both its current and potential investors. When a company's income statement shows a net loss, or more expenses than income, financiers may become hesitant to extend credit, fearing that they may not be repaid. Likewise, if a company consistently shows a profit, investors are more likely to see it as a solid investment, with the potential to be lucrative for both the business and those invested in it.

Health

The more established a business is, the more likely its income statement is to be an accurate reflection of the overall health of the business. For publicly traded companies, an income statement can provide shareholders with important information about the company's ability to provide its investors with a sufficient return and in turn the overall financial stability of the company.

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