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A Profit and Loss (P&L) statement, also called an income statement, reports a company’s revenue, expenses, and profit or loss for a specific accounting period. Mathematically, a company’s profit can be calculated as follows:
Revenue – Expenses = Profit Before Tax (PBT)
Profit Before Tax (PBT) – Tax Expense = Profit After Tax (PAT)
How to Perform a P&L Statement Analysis in India?
When analysing a company’s P&L statement, investors generally examine the following:
P&L Component
What to Analyse
Revenue
Check whether revenue is increasing or declining over multiple periods. Also, examine whether growth comes from higher sales volume, higher prices, or changes in the business mix.
Operating Expenses
Compare expenses such as raw materials, employee costs, and other operating costs with revenue.
Operating Profit
Examine whether profit from the company’s core operations is increasing and whether operating profit is growing in line with revenue.
Operating Margin
Calculate operating profit as a percentage of revenue.Compare the margin across multiple years to identify changes in operating profitability.
Interest Expense
Check the interest paid on borrowings. Rising interest costs can reduce profit before tax, particularly when the company has substantial debt.
Profit Before Tax (PBT)
Examine the profit remaining after operating expenses, depreciation, interest, and other applicable expenses but before tax.
Tax Expense
Compare the tax expense with Profit Before Tax (PBT) and examine significant changes in the company’s effective tax rate.
Profit After Tax (PAT)
Check whether the company’s final profit is growing over time and whether profit growth is supported by revenue and operating performance.
EPS
Examine earnings per share and compare its growth with PAT.
Year-on-Year Growth
Compare revenue, operating profit, PAT, and EPS with the corresponding period of the previous year to identify changes in financial performance.
Profit Margins
Compare operating and net profit margins over multiple periods to assess how much of the company’s revenue remains as profit after relevant costs.
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