PosiStep 11: Profit and loss: revenue, expenses, profit, margins, EPS
Week 3 opens up a company's accounts. The first statement is the profit and loss (P&L, or income statement): it shows how much the company sold, what it spent, and what was left as profit over a period.
Revenue: what the company sold
Revenue (also sales or turnover) is the money a company earns from selling its products or services during a quarter or a year, before any costs. It is the top line of the P&L.
Growing revenue usually means more customers or higher prices; falling revenue is worth understanding before anything else.
Expenses and operating profit
From revenue the company pays its expenses: raw materials, employee salaries, rent, marketing and other running costs. What remains is operating profit, the profit from the core business. You may also see EBITDA: operating profit before depreciation (the wear and tear of machines and buildings) and amortisation are deducted.
Operating profit shows whether the business itself makes money, before the effects of borrowing and tax.
Interest, tax and net profit
Next come interest on borrowings, depreciation and tax. What is finally left for shareholders is net profit (the bottom line, or PAT: profit after tax). A loss means expenses were larger than revenue.
Watch for one-off items, such as selling a building. They can make one year's net profit look unusually high or low.
Margins: profit as a share of revenue
A margin shows how much of each ₹100 of revenue turns into profit. Operating margin = operating profit ÷ revenue; net margin = net profit ÷ revenue. A company with ₹1,000 Cr revenue and ₹150 Cr net profit has a 15% net margin.
Margins differ a lot between industries: software companies often have high margins, supermarkets low ones. Compare margins within the same industry and across years.
EPS: profit per share
Earnings per share (EPS) = net profit ÷ number of shares. It tells you how much profit belongs to each share, and it is the base for the P/E ratio in PosiStep 14.
Companies report results every quarter, and a full year's results once a year. Comparing the same quarter across years (for example, this June quarter with last June) avoids seasonal effects.
Where PositoAI fits
The Go Deep tab shows each company's quarterly results and revenue and profit for recent years. The Funda tab (PosiFunda) explains growth and margins for that company in plain words, compared with similar companies.
Key terms
- Revenue
- Money earned from sales before any costs: the top line.
- Operating profit
- Profit from the core business, before interest and tax.
- Net profit (PAT)
- What is left for shareholders after all costs, interest and tax: the bottom line.
- Net margin
- Net profit ÷ revenue, as a percentage.
- EPS
- Earnings per share: net profit ÷ number of shares.
- EBITDA
- Operating profit before depreciation and amortisation.
Try it
Made-up company Pine Retail had revenue of ₹500 Cr and a net profit of ₹50 Cr. It has 10 crore shares. What is its EPS?
EPS = net profit ÷ shares = ₹50 Cr ÷ 10 crore = ₹5 per share. Its net margin is ₹50 Cr ÷ ₹500 Cr = 10%.
See it live on PositoAI
Open Infosys's Go Deep tab and find its revenue and net profit for the last two years. Did both grow? Then work out its net margin for the latest year (net profit ÷ revenue).
What this does not tell you
One year's profit can be lifted or cut by one-off items, and a P&L does not show debt or cash. A company can report a profit and still run short of cash, which PosiStep 13 explains.
Quick quiz
What is revenue?
Revenue is total sales before any expenses are deducted; it is the top line of the P&L.
Which profit is left for shareholders after all costs, interest and tax?
Net profit (PAT) is the bottom line, after expenses, interest, depreciation and tax.
Revenue ₹800 Cr, net profit ₹80 Cr. What is the net margin?
₹80 Cr ÷ ₹800 Cr = 0.10, which is a 10% net margin.
How is EPS calculated?
Earnings per share = net profit ÷ number of shares.
Why compare the June quarter with last year's June quarter?
Many businesses are seasonal, so comparing the same quarter across years is fairer.
Answer every question on this page correctly to complete this PosiStep.
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PosiCourse is for education only. It does not recommend buying or selling any share. Examples with made-up numbers are not real companies. PositoAI is for research and education only and is not investment advice.