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
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.