Every month, I post my personal income statement (here’s November’s). I break down my income and expenses in each category and show how they’ve increased or decreased over the last few months. This helps me (and any readers) get a good sense of my financial well-being.
The Motley Fool offers an introduction to company income statements which is designed to help the novice investor (like me) understand more about a company. The important thing to take away is that the raw numbers presented in these financial statements don’t mean much without context. Context can be a description of the company’s activities or industry trends.
As the article states, a gross margin (gross profit divided by cost of goods sold) may be considered “good” in one industry or “bad” in another industry. Besides comparing ratios to industry averages, year-to-year comparisons also shed some light on the trend of a company’s health. If profit margins steadily decrease, you can be sure that some shake-up within the company will be necessary.
While the article from Motley Fool introduces the subject, if you want a deeper understanding of income statements, there are additional resources available. Ameritrade has a more detailed description with an example. Wikipedia and Investopedia have their own approaches as well. The understanding of this financial statement is invaluable for any investor who wishes to go beyond the buy-index-fund-and-hold strategy.
Updated February 7, 2012 and originally published December 27, 2005. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.