What is a Profit & Loss Statement and why it is important?

What Is a Profit & Loss Statement?


A profit and loss statement, also known as an income statement or a P&L is a financial report that provides a summary of a company’s revenues, expenses, and profits/losses over a given period of time. It shows a company’s ability to generate sales, manage expenses, and create profits.



Why Is a Profit & Loss Statement Important?

  • It helps businesses stay in control of their future direction and profitability.

  • It helps organizations examine their financial health and profitability over a historical period. How much money is truly coming in? How much money is going out?

  • It helps understand where the costs are coming from, how to cut them, and how to maximize your net income.

  • It helps calculate profit margins, which show how good the business is at converting revenue into profits.


Structure of the Profit & Loss Statement


A company’s profit and loss statement is portrayed over a period of time, typically a month, quarter, or fiscal year.


The main categories that can be found on the P&L include:

  • Revenue (or Sales)

  • Cost of Goods Sold (or Cost of Sales)

  • Selling, General & Administrative (SG&A) Expenses

  • Marketing and Advertising

  • Technology/Research & Development

  • Interest Expense

  • Taxes

  • Net Income


Example of a Profit & Loss Statement


Below is an example of Amazon’s 2017-2019 P&L statement, which they call the Consolidated Statement of Operations.


Source: Amazon's public financial statements (https://ir.aboutamazon.com/annual-reports-proxies-and-shareholder-letters/default.aspx)



How to Analyze a Profit & Loss Statement


One of the main jobs of CFOs and Advisors is to analyze the P&L of a company in order to make recommendations about the financial strength of the company, attractiveness of investing in it, or acquiring the entire business.


Examples of P&L statement analysis include:

  • Comparing year-over-year numbers (horizontal analysis) as well as industry benchmarking

  • Looking at margins: gross profit margin, EBITDA margin, operating margin, net profit margin

  • Trend analysis: are metrics improving or deteriorating

  • Rates of return: return on equity (ROE), return on assets (ROA)

  • Valuation metrics: EV/EBITDA, P/E ratio, Price to Book, etc



What Is the Difference Between P&L Statements and Balance Sheets?


A balance sheet illustrates what your company is worth. While a P&L statement illustrates how your profitability has changed over time.