How to read a company's income statement
The income statement shows how much a company sells and how much it keeps after paying everything needed to sell. It is the starting point of any analysis: earnings per share, the P/E ratio and margins all come from it. We use a fictional company, Example Corp, with the same figures throughout this series, so you can see how the income statement, balance sheet and cash flow fit together.
- Read it top to bottom: revenue → gross profit → EBITDA → EBIT → pre-tax profit → net income.
- Margins (each line divided by revenue) say more than absolute figures.
- Compare at least five years and against companies in the same sector.
- Watch for one-off items: they can inflate a single year.
- Accounting profit is not cash: always check free cash flow too.
The structure, line by line
Example Corp's annual income statement, in millions of dollars:
What each margin tells you
- Gross margin (40%): how much of each dollar sold is left after paying for the product. A high, stable gross margin often signals pricing power.
- EBITDA margin (18%): operating profitability before depreciation, interest and taxes. Useful to compare companies with different debt.
- EBIT margin (13%): includes the wear and tear of assets. Stricter and more realistic in capital-intensive businesses.
- Net margin (8.25%): what is left for shareholders after everything.
No margin is good or bad in the abstract: a supermarket lives on thin net margins and software on high ones. Always compare within the sector. See ROIC and margins.
EBITDA: useful, but handle with care
EBITDA is popular because it approximates the cash generated by operations and lets you compare companies with different debt levels. But it ignores depreciation, which reflects real investments the company must repeat to keep operating.
In capital-intensive businesses (industry, telecoms, energy), the gap between EBITDA and EBIT is large, and looking only at EBITDA makes them look more profitable than they are.
How to read it over time
One year says little. With five or ten years of accounts, look for:
- Steady revenue growth, not jumps.
- Stable or rising margins: if revenue grows but margins fall, growth comes at the expense of profitability.
- EPS growing at least as fast as net income: if it grows slower, new shares are diluting shareholders.
- Interest expense under control relative to EBIT.
Red flags
- Net income rising much faster than revenue without a clear explanation.
- One-off gains (an asset sale) masking a weak year.
- Margins far above every competitor without an obvious advantage.
- Growing accounting profit with flat or negative free cash flow.
- Frequent changes in accounting policies or in how results are presented.
Where to find it
Listed companies publish audited annual accounts and quarterly or half-year results on their investor relations website and with their securities regulator (in the US, in 10-K and 10-Q filings). Start with the consolidated income statement in the annual report and read the notes whenever something does not add up.
Frequently asked questions
What is an income statement?
The financial statement showing a company's revenue, expenses and profit over a period, usually a year or a quarter.
What is the difference between EBITDA and EBIT?
EBIT subtracts depreciation and amortisation, which reflect the wear of assets. EBITDA does not, so it is always higher.
What is a good net margin?
It depends on the sector. What matters is comparing it with competitors and the company's own history, and that it is stable.
Is the income statement enough to analyse a company?
No. Combine it with the balance sheet (debt and assets) and the cash flow statement, which shows whether profit turns into real money.