How to Analyze the Income Statement in Excel?

You are a novice investor considering a promising technology startup. You’ve heard impressive reviews about their revolutionary product, but do their finances support the hype? This situation emphasizes the significance of knowing how to analyze income statements.

Income statements give a quick look at a company’s financial health. They expose vital details regarding income, costs, and profitability. 85% of business leaders view financial data analysis as crucial in making decisions.

The numbers tell a story. An example is Apple’s 2020 financial report. It indicated a net profit of $57.4 billion, marking a 3.9% rise compared to the year before. Despite a global pandemic, the company’s growth demonstrates its resilience and strong market standing.

How to analyze financial statements is not limited to larger corporations. Small businesses also benefit. A study by Wasp Barcode Technologies found that 40% of small business owners consider themselves financially illiterate. This knowledge gap can lead to missed opportunities and poor financial decisions.

How to analyze income statements can reveal hidden insights. For example, one might observe that profit margins decrease as a company’s earnings increase. This might suggest increasing prices or ineffective procedures, leading to a need for additional inquiry.

Let’s explore this topic further. We’ll explore specific techniques and ratios used in income statement analysis.

Table of Contents:

1. What is an Income Statement?
2. How to Read Income Statements?
3. How is It Used?
4. Income Statement vs. Balance Sheet
5. What are the Tips for Income Statement Analysis?
6. How to Analyze an Income Statement?
7. Wrap Up

First…

What is an Income Statement?

Definition: An income statement, also known as a profit and loss statement, shows a company’s financial performance over a specific period. It lists revenues and expenses.

• Revenues include sales and other income.
• Expenses cover costs like salaries and rent.

The difference between them is the net income or loss.

The income statement, also known as a profit and loss statement, helps investors and management understand profitability. It starts with total revenue, subtracts operating expenses, and shows the net profit or loss. To visualize this data effectively, using the best graph to show profit and loss—such as a bar or waterfall chart—can provide clear insights into how each component contributes to the bottom line.

This financial document is essential for assessing a company’s health. It is a key tool for making data-driven decisions.

So, what does an income statement look like?

Take a look at the income statement examples below, which were created using ChartExpo.

Horizontal Waterfall Chart

Sankey Chart

How to Read Income Statements?

Reading an income statement might seem daunting, but it’s easier than you think! This key financial document can tell you a lot about a company’s performance. Let’s break down the main components one step at a time:

1. Revenue (or sales): This is the total amount of money the company has earned from its business activities during the period. It’s usually the first line on the income statement.
2. Cost of Goods Sold (COGS): This includes all the direct costs of producing the company’s goods or services. Subtracting COGS from revenue gives you the gross profit.
3. Gross Profit: This is the revenue minus the COGS. It shows how much money the company makes from its core activities before other expenses are considered.
4. Operating Expenses: These are the costs required to run the company, not directly tied to producing goods or services. Examples include salaries, rent, and utilities.
5. Operating Income: Also known as operating profit, this is the gross profit minus operating expenses. It shows the profitability of regular business operations.
6. Other Income and Expenses: This category includes additional earnings or costs unrelated to the core business operations. Examples include interest or investment income.
7. Income Before Tax: This is the operating income plus or minus other income and expenses. It represents earnings before the company pays taxes.
8. Income Tax Expense: This line shows the amount of tax the company needs to pay on its income before tax.
9. Net Income: This is the final profit or loss after all expenses, including taxes, have been deducted from the total revenue. It’s the bottom line that shows the company’s overall profitability during the period.

How is It Used?

The income statement isn’t just a financial document. It’s a powerful tool used by various stakeholders to make informed decisions. Let’s explore how different groups use it to their advantage:

• Management: Company leaders use the income statement to assess performance, set strategic goals, and make informed decisions. By understanding the financial metrics, they can align their strategies with business objectives and drive growth effectively.
• Investors: Investors rely on the income statement to evaluate a company’s profitability and growth potential. It helps them decide whether to buy, hold, or sell their shares.
• Creditors and lenders: Banks and other lenders examine the income statement to determine a company’s ability to repay loans.
• Analysts: Financial analysts scrutinize the income statement to forecast future performance and provide recommendations. They look for trends in revenue, expenses, and profitability.
• Regulatory agencies: Government bodies use the income statement to ensure financial regulations and tax laws compliance.
• Employees: Employees can gain insights into the company’s financial health from the income statement. It can impact job security, potential raises, and bonuses.

Income Statement vs. Balance Sheet

The income statement and balance sheet are crucial but serve different purposes. Let’s see how they compare:

What are the Tips for Income Statement Analysis?

Analyzing an income statement can reveal a lot about a company’s financial health. Here are key tips to make your analysis more effective:

• Compare periods: Examine income statements from different periods to identify revenue, expenses, and profitability trends. This will help you understand the company’s growth and performance over time.
• Calculate ratios: Use financial ratios like gross profit margin, operating margin, and net profit margin to assess the company’s efficiency and profitability. Ratios provide valuable insights that raw numbers alone can’t offer.
• Review operating expenses and COGS: Analyze the cost of goods sold (COGS) and operating expenses to see how efficiently the company manages its costs. Significant changes in these areas can indicate shifts in business strategy or operational efficiency.
• Benchmark against peers and consider context: Compare the company’s income statement to its competitors and consider the broader economic context. This helps you gauge the company’s relative performance and understand external factors impacting its results.

How to Analyze an Income Statement?

Data analysis can be a headache. Numbers everywhere. Spreadsheets galore.

Now we have the income statement – a financial puzzle waiting to be solved. But fear not! Data visualization is here to save the day. It transforms those mind-numbing figures into eye-catching insights.

Sadly, our old friend Excel falls short in this department. Its charts are as exciting as watching paint dry.

That’s where ChartExpo swoops in, cape fluttering. This data visualization superhero turns your income statement into a visual feast. No more squinting at rows and columns. ChartExpo brings your financial data to life, making analysis a breeze.

Let’s learn how to install ChartExpo in Excel.

1. Open your Excel application.
2. Open the worksheet and click the “Insert” menu.
3. You’ll see the “My Apps” option.
4. In the Office Add-ins window, click “Store” and search for ChartExpo on my Apps Store.
5. Click the “Add” button to install ChartExpo in your Excel.

ChartExpo charts are available both in Google Sheets and Microsoft Excel. Please use the following CTAs to install the tool of your choice and create beautiful visualizations with a few clicks in your favorite tool.

Example

Let’s analyze the income statement data below using ChartExpo.

• To get started with ChartExpo, install ChartExpo in Excel.
• Now Click on My Apps from the INSERT menu.

• Choose ChartExpo from My Apps, then click Insert.

• Once it loads, choose the “Sankey Chart” from the charts list.

• Click the “Create Chart From Selection” button after selecting the data from the sheet, as shown.

• ChartExpo will generate the visualization below for you.

• If you want to have the chart’s title, click Edit Chart, as shown in the above image.
• Click the pencil icon next to the Chart Header to change the title.
• It will open the properties dialog. Under the Text section, you can add a heading in Line 1 and enable Show.
• Give the appropriate title of your chart and click the Apply button.

• You can disable the “Show Node Outline” as follows:

• You can disable the Footer Label as follows:

• You can add the dollar sign and also show a negative number in Parentheses as follows:

• Let’s give colors to the nodes. Click the pencil icon at the top of the nodes and go to “Node“. Select the color and click the “Apply” button to save all changes.
• Click the “Save Changes” button to persist the changes.

• Your final chart will appear below.

Insights

Regional revenue contributions:

• US & Canada: $3.93B
• Gross profit: $3.53B
• Cost of revenue: $5.31B
• Operating profit: $1.5B
• Net profit: $937.8M
• There are significant operating costs in marketing, technology, and General & Administrative (G&A).

FAQs

What is the basic calculation used to analyze an income statement?

The basic calculation for an income statement involves subtracting total expenses from total revenues. This includes costs of goods sold, operating expenses, interest, and taxes. The result is the net profit or loss for the period.

How do you interpret an income summary?

Interpreting an income summary involves examining net profit or loss. Positive values indicate profitability, while negative values indicate losses. This summary helps evaluate financial performance and informs future business decisions.

How can you tell if a company is profitable from an income statement?

To tell if a company is profitable from an income statement, check if revenues exceed expenses. Look at the net profit or net income at the bottom. A positive net income indicates profitability, while a negative indicates a loss.

Wrap Up

Analyzing an income statement involves several crucial steps. First, compare income statements over different periods. This helps you spot trends in revenue and expenses. It gives insight into the company’s growth and consistency.

Next, calculate financial ratios. Ratios like gross profit margin and operating margin are key. They reveal the company’s efficiency and profitability. These ratios offer a deeper understanding beyond raw figures.

Examine the cost of goods sold (COGS). A detailed look at COGS shows how well the company controls production costs. Significant changes can indicate shifts in operations or strategy.

Review operating expenses. These are essential for assessing management’s control over costs. Large fluctuations may need further investigation. Consistent expenses are a good sign of stability.

Benchmark the company against its peers. Comparing with competitors provides context. It helps to see if the company is performing well within its industry. This perspective is crucial for a balanced analysis.

Finally, consider the broader economic context. External factors can heavily influence results. This holistic approach ensures a comprehensive analysis.

Follow these steps to analyze your income statement thoroughly. This process will reveal the financial health and operational efficiency of your company. It aids in making informed business decisions.