Why Investors Need to Understand the Profit and Loss Statement: A Professional Guide to Reading the Profit and Loss Statement

If you want to make smart investment decisions, reading the (Profit & Loss (P&L) Statement) is an essential foundation. This financial document tells you where the business generates revenue, how it spends money, and what the actual profit is over a specified period.

The P&L is the lens through which you see the true financial condition of a business

Profit and Loss Statement (P&L) or Income Statement is a key financial document that reflects the overall performance of a company over a given period, whether it’s a month, quarter, or fiscal year. This document shows:

• Where the business’s revenue comes from
• What expenses are incurred
• The remaining profit or loss after all expenses

For managers, the P&L helps optimize business strategies for greater efficiency and also aids in planning future growth.

Main components of the Profit and Loss Statement

The basic formula that every accounting student memorizes is:

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

However, in reality, the P&L is more complex because it breaks down revenue and expenses into multiple levels:

Sales and Service Revenue − Cost of Goods Sold = Gross Profit (Gross Profit)

Then, gross profit minus selling and administrative expenses gives Operating Profit (Operating Profit), which reflects overall management efficiency.

Next, subtract financial expenses (e.g., interest on loans (such as loan interest)) to arrive at Earnings Before Tax (EBT) (EBT), and finally, after deducting all income taxes, you get Net Income (Net Income), which is the profit available to shareholders.

Understanding key line items

Revenue (Revenue)

• Operating Revenue (Operating Revenue): Money earned from selling products or services—this is the core of the business
• Non-operating Revenue (Non-operating Revenue): Income from interest, trading gains, rent, or other non-core activities

Expenses (Expenses)

• Cost of Goods Sold (Cost of Goods Sold): The cost of products, labor, raw materials involved in production
• Selling Expenses: Advertising, marketing, transportation, commissions
• Administrative Expenses: Salaries, office rent, training costs, and other management-related expenses

What each profit level indicates

Gross Profit (Gross Profit) shows whether the business can price its products above cost and by how much. A low gross profit may signal high costs or production management issues.

Operating Profit indicates how well the business manages its core operations—sales, marketing, administration. A shrinking operating profit could mean expenses are rising too much.

Net Profit (Net Profit) is the final figure investors care most about because it shows how much profit remains after all expenses, representing the actual earnings available to shareholders.

How to prepare two common formats of the P&L

( Report Format )

This format arranges data from top to bottom:

• Header: Company name, financial statement name, period
• Revenue section ###usually totals are included(
• Expenses section )usually totals are included(
• Final calculation: difference = profit or loss

Advantages: Easy to understand, resembles a natural report, suitable for presentation to management or owners.

) Account Format (

This format divides the page into two sides:

• Left side shows expenses
• Right side shows revenues
• At the bottom, both sides should balance )Revenue + Profit = Expenses###

Advantages: Clear, follows international accounting principles, accepted by regulatory agencies.

How to read a P&L like a professional

( Step 1: Check the period

First, look at the statement date. Different businesses may choose different periods )monthly, quarterly, yearly(. Knowing the period helps compare with previous periods or competitors.

) Step 2: Look at profit or loss

When you see the net profit figure, ask yourself: Is this business making money or losing money? This immediately indicates the financial health.

• Revenue > Expenses = Profit ✓ Good
• Revenue < Expenses = Loss ✗ Caution

For example, the Bank of Thailand in 2022 had a net profit of 191,077,634,015 THB, indicating it earned a lot.

Step 3: Assess revenue sources

Don’t be satisfied with just the total revenue figure. Check where the revenue comes from:

The Bank of Thailand has five revenue streams:

• Interest income from loans (main)
• Gains from trading investments
• Fees and service income
• Gains from exchange rate fluctuations
• Other income

If revenue relies on a single source, the business may be high risk. Diversified income sources suggest more stability.

Step 4: Analyze expenses

This is where you can identify opportunities for improvement if expenses are high:

The Bank of Thailand’s expenses fall into four categories:

• Interest paid to depositors
• Investment losses
• Salaries and benefits
• Other expenses

Good managers look for areas where costs can be reduced without compromising service quality.

Why is the P&L important?

Assessing financial health

The P&L is like a health check for a business. Increasing net profit indicates strengthening, while shrinking profit signals warning signs.

( Making informed investment decisions

Investors compare P&L statements to see which business generates more revenue, manages expenses better, and yields higher profits. This data forms the basis of investment choices.

) Planning long-term strategies

If you are a manager, the P&L helps identify what to adjust to ensure sustainable growth.

Monitoring performance

The P&L allows tracking whether profit margins ###Profit Margin### meet targets. A business may generate high revenue but still fail if profit margins are low.

Cautions when analyzing the P&L

Although the P&L provides vital information, don’t rely on it alone:

• Compare multiple periods to observe trends
• Consider context: a new business might have initial losses but high growth potential
• Review other financial statements: Balance Sheet ###Balance Sheet### and Cash Flow Statement (Cash Flow Statement) are equally important
• Account for external factors: business nature, management team, market conditions, supporting technology—all influence performance

Summary

Understanding the Profit and Loss Statement is one of the most crucial skills for investors and managers. Proper interpretation allows you to see the true picture of a business—its strengths, weaknesses, opportunities for improvement, and profit potential.

Remember, real profit isn’t just about revenue; it’s the net profit after deducting all expenses. The P&L clearly shows this. Study the P&L of businesses you’re interested in, and you’ll be better equipped to make confident investment decisions.