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How to analyze an income statement in less than 2 minutes:
The income sheet is one of the three major financial statements.

It shows a company’s:
▪️Revenue (Sales)
▪️Expenditures (Costs / Expenses)
▪️Net Income (Earnings, Profits)

Over a period of time.
Management teams have leeway in categorizing their income statement.

This means that not all income statements look the same.

Here is a typical layout and the meaning of the most commonly used terms:
Income statement answers two big questions:

1⃣ Is this company “profitable”?
2⃣ Is this company growing or shrinking?
Here’s what I focus on first when looking at an income statement:

1⃣ Period: Quarter? Year?
2⃣ Revenue: Direction?
3⃣ Gross Profit: Direction?
4⃣ Earnings Per Share: Positive?
5⃣ Share Count: Direction?
6⃣ Operating Costs: Direction?
Best Possible Answers:

1⃣ Multiple Annual Periods
2⃣ Growing quickly
3⃣ Growing faster than revenue
4⃣ Growing faster than gross profit
5⃣ Declining
6⃣ Growing slower than revenue
Other areas I quickly glance at:

▪️Cost of Goods Sold: Direction?
▪️Non-Operating: Any big changes?
▪️Tax Rate: Stable?
▪️Basic + Diluted Shares: Big difference?
It's also very helpful to look at margins.

Simply divide each line item by sales.

I focus heavily on gross margin, operating margin, and net margin:
Margins make it easy to compare a company to itself or its competitors.

Small margin changes might not seem like a big deal, but they are!

The one to watch like a hawk: gross margin.

Here are $DG recent numbers:
Income statements are most useful when measured over long periods of time.

Viewing $DG income statement over a decade shows how consistent it is.
I’d never make an investment without MUCH more analysis than this.

Accounting (and investing) is FILLED with nuance.

Still, with less than 2 minutes of analysis, you can quickly determine if a company is profitable, growing/shrinking, and worthy of a deeper dive.
Learning to read financial statements is an incredibly important skill, but accounting is FILLED with nuance.

@Brian_Stoffel_ and I are teaching a live course in January that explains accounting in plain English.

Interested? DM me for a coupon code.

maven.com/brian-feroldi/financials
Enjoyed this thread?

I guarantee you'll love this other accounting thread I wrote about the balance sheet, too:


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