When you begin learning fundamental analysis, one of the first financial statements you must understand is the Profit & Loss (P&L) Statement, also known as the Income Statement. It tells you how much money a company earned, how much it spent, and what profit remained at the end of the year.
In this article, we break down the P&L statement in an easy-to-understand manner—so you can analyze companies like a professional investor.
What Is a Profit & Loss Statement?
A P&L statement shows:
How much the company earned → Revenue/Income
How much the company spent → Expenses
How much profit it made after costs and taxes → Net Profit
It is essentially a report card of a company’s business performance for the year.
1. Start With the Top Line: Revenue
Revenue represents the total amount earned from customers.
In a typical P&L, this appears as:
✔ Revenue from Operations
For example, Bajaj Auto reports income from:
Selling motorbikes
Selling scooters (like Chetak)
Export operations
Spare parts
Services
Revenue from operations shows how strongly the core business is performing.
✔ Other Income
This includes income not related to the main business, such as:
Interest earned
Rental income
Dividend income
Gains from financial investments
Every line item usually has a Note Number next to it.
If you click on Note 21 or any other referenced note, you'll find detailed explanations of that line item.
2. Move to Expenses: What the Company Spends to Run the Business
All manufacturing and service companies have multiple expense categories. These typically include:
Raw material cost
Employee salaries & benefits
Power, fuel, and electricity
Factory expenses
Research & Development (R&D)
Advertising & marketing
Interest payments
Administrative expenses
These expenses determine how efficiently the company operates.
A company with rising revenue and rising expenses may not see significant improvement in profit.
That’s why understanding expense trends is crucial.
3. Operating Profit: The First Big Indicator
Once revenue and expenses are considered, you get:
Operating Profit (EBITDA)
This shows how much the business earns from core operations, before interest, taxes, and depreciation.
Strong operating profit = strong business fundamentals.
4. Profit Before Tax (PBT) and Profit After Tax (PAT)
After considering interest and depreciation, you get:
✔ Profit Before Tax (PBT)
Then subtract taxes to get:
✔ Profit After Tax (PAT)
This is the bottom line — the final profit available to shareholders.
But here’s where many beginners make a mistake:
👉 Don’t look at net profit alone.
A rising net profit is meaningless if:
revenue is stagnant
expenses are exploding
margins are shrinking
Always analyse the whole P&L, not just the profit number.
5. Notes to Accounts: The Most Underrated Section
Every line item in the P&L refers to a note number.
These notes contain:
break-ups of revenue
nature of expenses
explanations of one-time costs
clarity on accounting assumptions
If you skip the notes, you miss half the story.
For example:
A sudden spike in “Other Income” could be a one-time gain, not business growth.
A revenue jump could be due to price hikes rather than increased sales volume.
The notes help you decode such details.
A Simple Example
Suppose Bajaj Auto reports:
Revenue from operations: ₹100 crore
Other income: ₹20 crore
Total expenses: ₹50 crore
Taxes: ₹10 crore
Then:
Operating profit = ₹100 – expenses related to core operations
Total income = ₹120 crore
Net profit = Income – Expenses – Taxes = ₹60 crore
This gives you the company’s profit margin and efficiency.
Why Understanding the P&L Statement Matters
A well-read P&L helps you evaluate:
revenue growth
cost control
business expansion
pricing power
profitability
competitive strength
Without this understanding, you’re investing blindly.
Conclusion
Reading a P&L statement is one of the most essential skills in fundamental analysis.
To become a confident investor:
Study revenue sources
Analyse expense patterns
Understand operating profit
Read notes to accounts
Evaluate net profit in context
%20(2).png)
0 Comments