Follow the Money

The income statement—also known as the profit and loss (P&L) report—tells the story of how a business makes and spends money over a specific time period.

This lesson will show you how to read one, what to look for, and how to spot the difference between a thriving business and one that’s just burning cash.

What Is the Income Statement?

The income statement tracks financial performance—typically over a quarter or a year.

It answers one essential question:

How much does the company earn—and what’s left after all the bills are paid?

Revenue vs. Earnings

Top Line vs. Bottom Line

• Revenue (Top Line): Total sales from products and services.

• Example: Apple earns revenue from both iPhones and services like Apple Music.

• Earnings (Bottom Line): What’s left after all expenses—including production, payroll, interest, and taxes.

If earnings are negative, the company is spending more than it brings in.

Growth vs. Profitability

Not all profitable companies are growing—and not all growing companies are profitable.

Early-stage or high-growth businesses like Amazon or Tesla often operate at a loss, especially in their early years. That’s acceptable if:

• Revenue is growing consistently

• There’s a clear path to future profitability (e.g., economies of scale, new markets)

Growth without a plan is risky. But growth with strategy? That’s where wealth is built.

Key Metrics to Track (Across 5 Years)

• Revenue Growth: Consistent increases suggest strong demand and market share expansion.

• Earnings Trends: Look for rising profits—or losses that are narrowing over time.

• COGS (Cost of Goods Sold): The direct cost of producing products. Monitor how efficiently the company converts sales into profits.

Why COGS Matters

COGS is a window into operational efficiency.

• Example: A clothing brand that reduces its COGS from 60% to 50% of revenue is improving its margins—it’s producing goods more cheaply without sacrificing quality.

• Red Flag: Rising COGS while revenue stays flat could mean supply chain problems, inflation pressure, or poor cost control.

Where to Access Income Statements

You don’t need fancy software. Just use:

• Yahoo Finance

• Morningstar

• SEC EDGAR database (10-Ks for annual, 10-Qs for quarterly reports)

These platforms offer clear snapshots of the income statement and historical trends.

Putting It All Together

Let’s say a company checks these boxes:

• 20% annual revenue growth

• Shrinking COGS

• Positive earnings for the first time after years of losses

That’s a sign of a business turning the corner—and possibly a strong long-term investment.

But stay sharp:

Revenue growth without improving margins or profitability can still be a warning sign.

Use income statements to spot discipline, scalability, and smart capital allocation—traits that separate solid businesses from speculative hype.