The financial statements that companies release give investors good insights into how well they're performing. One of these is the profit and loss statement. More commonly known as the income statement, a P&L statement is a summary of a company's revenues and expenses during a specified period of time. Publicly traded companies are typically required to file these statements quarterly. While non-public companies don't have the same obligation, they often need to have profit and loss statements on hand when seeking money from private investors or pursuing bank loans.
Operating versus non-operating activities
The profit and loss statement is typically organized into operating versus non-operating activities. Operating revenues and expenses are those that result from a company's primary activities. If a company produces cellphones, the operating section of its profit and loss statement might include revenues from the sale of those phones. It might also include expenses that are directly tied to the manufacturing process, like the purchase of raw materials, equipment maintenance, and labor.
Non-operating revenues and expenses, meanwhile, are those that don't relate to a company's primary activities. Using our example, if a cellphone manufacturer sells off one of its production plants and makes a profit, that revenue falls under non-operating revenue. Along these lines, if the same company is forced to pay a settlement as the result of a lawsuit, that expense falls under the non-operating category.
Net income versus net loss
The purpose of a profit and loss statement is to show whether a company has been profitable or not over a specific time frame. If a company's total revenues exceed its expenses and losses, it can record a net income on the bottom line of its profit and loss statement (which is why net income is often referred to a company's bottom line). On the flip side, if a company's expenses and losses surpass its revenues, the profit and loss statement will record a net loss.
While the profit and loss statement only captures net income or loss for a specific period of time (such as a single quarter), if investors or lenders see that a company has been profitable, they're more likely to put money into that business or grant that business the financing it needs. On the other hand, if a company records net losses, investors and lenders will view that as a negative sign, and potentially opt not to do business with that company.
Earnings per share
Earnings per share is an important metric on the profit and loss statement. Companies that are publicly traded must report their earnings per share, a figure that is calculated by dividing a company's net income by its total number of shares. Earnings per share, like net income, is an indication of a company's strength and profitability. The more earnings a company has, the more money it can reinvest in the business or make available to investors.
As an investor, studying a company's profit and loss statement could give you insights into whether it's the right place to put your money. Keep in mind, however, that it only records net income or losses for a specific period of time. Furthermore, it's only a single piece of a given company's total financial picture. To make an informed decision, it's best to look at other major financial statements as well, like the balance sheet and statement of cash flows, which will give you a more complete sense of a company's financial health.
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