Company financial statements consist of an income statement -- also referred to as a profit and loss statement or a net earnings statement -- balance sheet and cash flow. Income statements reflect a company's fluctuations in income over time, usually annually or bi-annually. These and other key components reflect the stability and earning potential of the organization.
Total revenue is the primary component of an income statement, as it measures the total amount of money the company generates from sales. As a gross value, expenses are not deducted from the total revenue. This figure is of particular interest to the investors, as it demonstrates the year-on-year growth of the company.
Every company incurs expenses to generate income, with the two major types being operating and non-operating expenses. Operating expenses arise daily from necessities like cost of sales, marketing, administration, research and development. Non-operating costs include financial and investment expenses like interest, dividends, interest and profits made on securities of other companies. Income tax paid, depreciation and amortization also fall under expenses.
Gross profit -- also known as gross income or gross margin -- is the difference between total revenue and expenses incurred when turning profit. Apart from showing the difference between sales and expenses, gross profit gives an idea of the available resources a company has to cover other expenses. A stable and high gross margin indicates lower financial risk for investors.
Earnings Before Interest and Tax, or EBIT, is operating income and is the most effective indicator of a company’s performance. Deducting interest and taxes from EBIT shows the earning capacity of a company. Stock market analysts consider operating income a more significant measure of a company’s profitability than net income.
Earnings per Share
Most income statements include Earnings per Share, or EPS, in their income statement. EPS is the net income divided by the number of outstanding shares of the company. Earnings per share usually indicates how much money shareholders will receive if the company allocates the entire net income among its shareholders.