Formulas, Calculations and Financial Ratios for the Income Statement

Investing Lesson 4 - Analyzing an Income Statement

Financial Ratio Calculations for the Income Statement
This summary page was meant to be an easy-to-use reference for you to write down or print the financial ratio calculations you've learned thus far in this investing lesson on income statement analysis. PhotoAlto / Odilon Dimier / Getty Images

Congratulations!  You've learned how to analyze an income statement! I want to talk about financial ratios and calculations.

While you already know that financial ratios are important, and you've learned how to calculate many different financial ratios from the income statement by this point in the investing lesson, I wanted to create an easy-to-reference summary sheet for you to keep.  That way, whenever you are working your way through a company's financial statements and you get to the income statement, you can begin doing the calculations yourself by having it written on a scrap of paper or in a notebook.

One recommendation I'd make is to organize your financial ratios by category.  Usually, I break down financial ratios into five different categories as I believe it makes understanding their purpose easier and helps you sort what you're attempting to measure in your head; a way to get a better, bigger picture of how the various components fit together.  As you develop your skills and become more familiar with accounting and finance, you'll start developing your own mental framework.

Income Statement Formulas, Calculations, and Financial Ratios Reference Guide

Below is a list of the things you have learned in this lesson if you followed it step-by-step using the navigation at the bottom of each page.  

In addition, you learned several financial ratios that required calculations discussed in Investing Lesson 3: Analyzing a Balance Sheet, which cannot be performed unless you have both the income statement and balance sheet in front of you.

Of course, these financial ratios are only the start; a beginner's guide to basic financial analysis.  The ultimate goal is to get to the point you can calculate something known as owner earnings.  That is what I am looking for in my own life when I acquire a productive asset as well as the thing we'll be searching for when our asset management company, Kennon-Green & Co., opens its doors to private clients who want to invest alongside my family later in the year.  That metric is really attempting to answer the question, "If I owned this asset, how much cash could I extract from it after taking care of necessary expenses, taxes, and maintenance capital expenditures required to keep unit volume steady without harming the competitive position of the enterprise?".  When you take an owner earnings approach to income statement analysis, you need all three financial statements together - balance sheet, income statement, and cash flow statements - as well as the ability to discount cash flows to come up with a net present value.

 The objective is then to pay a fair or reasonable price for the business with ​a heavy emphasis on companies that appear to be both quantitatively and qualitatively higher in quality.  That's the end game.  That's the ultimate prize for a financial analyst and, in actuality, can be applied to real estate investments as well as equities.

This page is part of Investing Lesson 4 - How to Read an Income Statement. To go back to the beginning, see the Table of Contents.