Practice Income Statement Analysis with a Real Statement
The best way to learn how to read and analyze an income statement is to pick up a real company's annual report or Form 10-K and familiarize yourself with the financial statements contained there. Practice reading them and interpreting them.
It's a good idea to get your hands on more than one so you can see how they're similar or different. You can examine some of the unique lines you might notice on one company's income statement but that doesn't appear on that of another firm.
You'll notice how certain businesses in different sectors or industries have completely different economic characteristics.
This can result in the completely different profitability pictures that tend to result in some sectors and industries, producing much better outcomes for shareholders over decades. You'll begin to "see" the business through these income statements, especially when you measure them in conjunction with other financial statements and the footnotes. You'll begin to understand the things that drive profitability and how rigid the cost structure might be.
An Example of Income Statement Analysis
This income statement analysis lesson retains the original sample income statement that was first published here several years ago. It's an oldie but goody and it's worth going back to because it covers all the bases and poses an understandable example.
It comes from Microsoft's 2001 annual report and it shows the full fiscal year income statement figures for three years: 2001, 2000, and 1999.
Although the world has changed significantly since then, the big concepts and principles haven't. They have not been modified much. Seeing the timelessness of fundamental analysis can also help you realize the power of a good long-term investment.
Sample Income Statement
|Cost of Goods Revenue||$5,191,000,000||$3,455,000,000||$3,002,000,000|
|Research and Development||$4,307,000,000||$4,379,000,000||$3,775,000,000|
|Selling, General, and Administrative Expenses||$6,957,000,000||$5,742,000,000||$5,242,000,000|
|Other Operating Expenses||N/A||N/A||N/A|
|Total Other Income and Expenses Net||($397,000,000)||($195,000,000)||$3,338,000,000|
|Earnings Before Interest and Taxes||$11,513,000,000||$11,525,000,000||$14,275,000,000|
|Income Before Taxes||$11,513,000,000||$11,525,000,000||$14,275,000,000|
|Income Tax Expense||$3,684,000,000||$3,804,000,000||$4,854,000,000|
|Equity Earnings or Loss Unconsolidated Subsidiary||N/A||N/A||N/A|
|Net Income from Continuing Operations||$7,829,000,000||$7,721,000,000||$9,421,000,000|
|Effect of Accounting Changes||N/A||($375,000,000)||N/A|
The Take-Away Lesson
Truly great businesses have a certain stability in their core economic engine, and this lets them enjoy specific advantages. A firm like Microsoft, one of the best and most successful businesses of all time, is inherently less secure than a firm like Hershey.
Think about it. The activities that produce the numbers in Microsoft's income statement are subject to change at any given time. They're subject to technological advancement and fierce competition that can attack on all fronts and from all sides. As Microsoft founder Bill Gates once said, the firm's next biggest competitor could be a kid in a garage.
NOTE: If you're a novice investor, please consult with a financial advisor for the most up-to-date advice and answers to any specific questions you might have. Don't jump in blindly. The information contained in this article is not intended as investment advice and it is not a substitute for investment advice.