The Income Statement
An important aspect of annual stock reports!

The income statement, also known as the profit and loss statement and the statement of financial performance, is where the company tells you about the money comings and goings.

There are several key items to check on a basic income statement.

The first is revenue growth or sales growth. A company that is not growing its revenue or sales will find it difficult to grow its net profit. A minimum benchmark of 5% growth per year on revenue or sales over the last few years is my reasonable expectation.

The operating margin is a key statistic for industrial and service companies. It shows the underlying profitability of the business before the effects of financing and from new investments.

The operating margin is calculated by dividing the earnings before depreciation, amortisation, interest and tax, by operating revenues.

The trend of operating margin is particularly important and can give a good indication of the long-term viability of a given business.

Another test of net income is earnings per share (eps) growth. I focus on companies growing eps by a minimum of ten percent per annum over a five-year period.

A good business that is increasing sales and revenue should be showing a profit. But if the company is not keeping the lid on expenses, profits will suffer.

The net profit margin is a measure of the percentage of profit that ends up on the bottom line for every dollar sold or earned.

The net profit margin is calculated by dividing the net profit after tax before abnormal items, by revenues.

The profit margin includes all depreciation, amortisation, tax and interest charges which are not included in the operating margin calculation.

Some industry sectors tend to have small profit margins and some have larger, so I look for companies that have above average net profit margins for their sector.

A sign of trouble is if the net profit margin declines over several years. This could indicate a number of possibilities including not being able to control expenses, greater competition or an increase in the cost of materials.

So net profit margin would be best seen as trending higher over a number of years and be holding up above the industry average in that time period.

Keeping an eye on the above key items in the financial income statement can provide valuable information for value investors.

An example of this income financial statement can be found in all annual company reports.

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