The Income Statement is a company's financial statement that indicates how the revenue is transformed into net income. It shows revenues, costs, expenses, write-offs, and taxes for a specific period. The purpose of the Income Statement is to show investors how much money the company made or lost during that period. It shows how much earnings power and disposable income the company has. The Income Statement is the first place to look and determine if the company has a Durable Competitive Advantage.
Below are the ratios and equations that needs to be checked to determine if the company is a good investment. We are looking for a company that makes a lot of money. A company of high earnings power. A business that is least likely to file bankruptcy. An excellent corporation that is here to stay forever.
Ratios and Equations
- Gross Profit Margin
- Business Cost to Gross Profit
- Research and Development
- Depreciation/Amortization to Gross Profit
- Interest Expense to Operating Income Ratio
- Net Profit Margin
- Earnings Per Share (EPS)
- Accounting Gimmicks
Example
Income Statement for Johnson & Johnson (JNJ)
Source: Google Finance
