A Guide for Investors • Benzinga

A company’s long-term success hinges on its financial health. In a competitive market, stable companies may come out on top while unstable companies can struggle to survive.

One of the clearest ways to assess a company’s health is through its income statement. This key financial document reveals how much money a business brings in, how much it spends, and whether or not it’s turning a profit.

Knowing how to read and analyze an income statement can give you a deeper understanding of whether or not a company is worth investing in. Here’s what you need to know.

What is an Income Statement?

At its core, an income statement summarizes a company’s revenue and expenses over a specific period, typically a month, quarter, or year, to determine whether it generated a profit or incurred a loss.

Publicly traded companies are required to file income statements with the U.S. Securities and Exchange Commission (SEC), making them readily accessible to investors. You can find them on the SEC’s website or on a company’s investor relations page. 

Key Components of an Income Statement

There are three primary components in every income statement: revenue, expenses, and net income (or loss).

• Revenue: Represents the money earned from selling products or services.
• Expenses: Includes the costs of operating a business, such as materials, labor, rent, and administrative overhead, as well as non-operating costs like interest, depreciation, and taxes.
• Net income (or net loss): The final result, calculating revenue minus expenses. This number also informs a company’s earnings per share (EPS), which is calculated by dividing net income by the average number of outstanding shares. EPS is a critical metric for investors, reflecting how much profit is attributed to each share.

Why Should You Know How to Read an Income Statement?

An income statement provides insights into how a business makes money and where it spends it. Those insights highlight a company’s profitability, and you can use them to benchmark its performance against competitors, assess operational trends over time, and evaluate how well the business is managing costs.

How to Read an Income Statement

Analyzing Revenue

At the top of the statement, you’ll find a company’s revenue. Many businesses report multiple revenue streams such as product sales, services, subscriptions, or rental income. These line items are often broken out to help investors understand where each stream is coming from.

For example, a restaurant might divide revenue into dine-in, delivery, and catering categories. Comparing current revenue figures with prior periods allows you to see whether sales are growing or declining.

Understanding Expenses

The income statement will provide a summary of the costs incurred by a company and how these expenses reduce its profit. The key categories of expenses are broken down into:

• Cost of goods sold (COGS): This is the direct cost incurred to generate revenue, and it varies by the company or industry it operates in. COGS includes the amount paid for the products a company sells, plus the cost of manufacture or the amount paid to employees for their services.
• Operating expenses: This is the cost paid to run a company. It includes insurance, rent, utilities, and office supplies. 
• Interest expense: When a company borrows money, it has to pay interest to the lender. Known as interest expense, it’s the cost of borrowing money. 
• Tax: Companies are liable to pay income tax based on their legal structure. 

Gross and Operating Profit

• Gross profit is revenue minus COGS. It reflects how efficiently a company produces its goods or services.
• Operating profit is what remains after subtracting operating expenses from gross profit. It indicates how much a company earns from its core business, before paying interest or taxes.

Higher gross and operating profits suggest strong cost management and pricing power.

Analyzing Net Income

The amount left after deducting all the expenses from the total income is net income. If the amount is negative, the company has incurred a loss. It’s usually the last line on an income statement, hence the term “bottom line.”

Net income reflects the profitability of a company and shows how efficiently it manages its costs. By comparing net income against industry benchmarks, investors can estimate how well a company manages its resources against rivals. 

Example of an Income Statement 

Imagine trying to figure out how much money you have left after a shopping trip. You start with your available cash, subtract everything you spent, and see what’s left. That’s essentially what an income statement does.

A typical income statement begins with the reporting period (e.g., “Year ended December 31, 2024”) and then lists:

• Total revenue at the top
• COGS, to calculate gross profit
• Operating expenses, to arrive at operating profit
• Other costs like interest, taxes, and depreciation
• Final net income at the bottom

Example:

Company A generated $1 million in product sales in 2025. After subtracting $240,000 in product costs, the company reported a gross profit of $760,000.

The company then incurred $660,000 in operating expenses. That leaves $100,000 in operating income. After accounting for interest, taxes, and depreciation, Company A ends the year with net income of $68,000.

Why It’s Worth Reading Before You Invest

The income statement is one of the most useful tools for investors and analysts. It offers a clear view of how a business operates, how efficiently it controls costs, and how profitably it’s run. Comparing the figures to industry averages, competitors’ results, or prior performance gives you key insights into a company’s health that can help you make smart investment decisions.

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