Why do investors need to understand the P&L Statement? The key to analyzing profit and loss

If you are a serious investor, reading the Profit and Loss Statement (P&L) or what is called the Income Statement is not optional but a skill you must have. Understanding how much revenue a business actually generates and how much it spends is looking into the heart of the business.

Income Statement: A document that tells the story of operations

P&L Statement is not just numbers on paper. It narrates the experience of the business over a period of (month, quarter, or year). It shows how much revenue was earned, how much was spent, and what profit or loss was made.

This income statement helps managers and owners see clearly where profits come from, which expenses are too high, and how to adjust to increase profitability.

Basic formula of an easy-to-understand income statement

Understanding the P&L at a basic level is not difficult:

Total Revenue (Total Revenue) − Total Expenses (Total Expenses) = Profit or Loss (Profit or Loss)

• Total Revenue = All money received from sales of goods, services, or other income sources
• Total Expenses = Money paid out for business operations, from production costs, rent, employee wages, to advertising
• Final Result = If revenue exceeds expenses, there is profit; if less, there is a loss

Layered profit analysis: Read more deeply

The income statement doesn’t just show the final profit but has multiple layers indicating various aspects:

Gross Profit (Gross Profit)

This is the remaining money after deducting the cost of goods sold from sales. It indicates how much you can mark up your products over costs. A high Gross Profit shows effective pricing strategies.

Operating Profit or EBIT (Operating Profit)

After deducting selling, administrative, and other operating expenses from Gross Profit, the result is Operating Profit. This figure indicates whether the core business is truly profitable.

Net Income (Net Income)

This is the final profit after deducting all expenses, including financial costs and taxes. Net Income is what the owner actually keeps.

Real example of P&L calculation

Looking at the Bank of Thailand’s 2022 income statement, we can see:

• Revenue comes from multiple sources: interest income, gains from trading investments, fees, and other income
• Expenses include: interest expenses, losses from trading investments, employee wages, and other operating costs
• Final result for that year was a net profit of 191,077,634,015 THB, demonstrating the bank’s profitability efficiency

Different formats of presenting P&L

1. Report Form (Report Format)

Presented simply with three sections: Revenue, Expenses, and Net Profit/Loss. This style is easy to read and suitable for non-experts.

Advantages:

• Easy to understand, naturally top-down
• Provides a clear overview
• Suitable for quick analysis

2. Account Form (Account Format)

Displays as a T-account with expenses on the left and revenue on the right. This format is more formal in accounting.

Advantages:

• Clear and comprehensive
• Accepted by government agencies
• Structured and convenient for preparation

How to read a P&L like a pro

Step 1: Check the period

Start by understanding what period this statement covers—monthly, quarterly, or yearly. Knowing the timeframe helps interpret the figures better. For example, compare profits during peak season versus off-season.

Step 2: Look at the big picture first

Have you finished the numbers? If revenue > expenses, there is profit; if less, a loss. But the key is the size of the profit or loss.

Step 3: Trace the “source” of revenue

Don’t just look at total revenue. Explore where it comes from—main business? Side income? New ventures? Understanding revenue sources helps assess the sustainability of the business.

Step 4: Analyze the expense structure

Which expenses are the highest? Are they increasing or decreasing? Knowing the expense structure allows you to forecast where the business can cut costs or improve efficiency.

Why is the income statement important?

Measure business performance

Net profit indicates whether the business is truly successful or just looks good externally.

Make investment decisions

Investors use P&L to decide where to invest. Businesses with steadily increasing profits attract more investors.

Strategic planning

If certain expenses are rising excessively, management will know where to control or optimize.

Warning signs

If profits decline continuously or turn into losses, it’s a warning that changes are needed.

Important reminder: Don’t rely solely on the P&L

While the P&L Statement is a powerful tool, it’s not the whole picture. Additional analysis is necessary:

• Balance Sheet (Balance Sheet) — if P&L is about income, the Balance Sheet reflects accumulated assets and liabilities
• Cash Flow Statement — often a business shows profit on paper but lacks cash
• Financial Ratios — use Profit Margin, ROE, ROA, etc., for deeper analysis
• Management quality — good performance requires effective management

Ultimately, mastering how to read a P&L Statement gives you a higher-level view that enhances your investment decisions. Whether you are an individual investor or an institution, this understanding helps you avoid poor-performing businesses and catch growing opportunities.