Track 02 · Reading Financial Statements
The income statement, line by line
From revenue to net income: the ladder of deductions that decides what a company actually earned.
Each rung strips out one layer of expense, and each layer tells you something different about the business.
Illustrative proportions for a single period — the shape is standard, the split is the company’s own.
From revenue to net income
The income statement covers a period, a quarter or a year, and walks down from top-line revenue to bottom-line profit through a standard ladder of costs.
Each step removes one layer of expense, and each layer tells you something different about the business model.
- Revenue: what customers paid.
- Cost of goods sold: what it cost to make or deliver it.
- Gross profit: revenue minus COGS. It shows pricing power before overhead.
- Operating income: after the cost of running the company.
- Net income: after interest and taxes, the final result.
Earnings per share
Net income divided by shares outstanding gives earnings per share (EPS). It converts a corporate number into a per-share number you can compare against the share price, which is exactly what the P/E ratio does in the valuation track.
Watch the share count: a company can grow net income while EPS stays flat if it issues new shares along the way.
Margins show the quality of the profit
Dividing each profit line by revenue turns absolute dollars into rates: gross margin, operating margin and net margin. Margins are comparable across companies of any size and across years.
Stable or rising margins suggest pricing power and cost control. Shrinking margins with growing revenue often means the growth is being bought with discounts.
One-off items and adjustments
Restructuring charges, asset write-downs and legal settlements are marked as non-recurring, and companies often present an “adjusted” earnings figure that excludes them.
Read both. If the same “one-time” charge appears several years in a row, it is part of the cost of running this business.
Three things to remember
- 01The income statement is a ladder: revenue → gross → operating → net.
- 02EPS connects profit to the share price you pay.
- 03Margins show whether a business is getting better or worse; dollar profit does not.
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Tools on this site are for research and education. Nothing here is financial advice or a recommendation to buy or sell.