What is a P&L Statement: A guide to understanding the profit and loss statement for investors

If you are an investor or a business executive, reading and understanding the profit and loss statement is no longer an avoidable skill. This financial document serves as a “mirror” that clearly reflects the health of the business, whether it’s profits generated, hidden expenses, or even operational weaknesses.

What is in the (Profit and Loss Statement)?

The profit and loss statement, or P&L for short, is a financial document that provides an overview of operations during a specified period, comparing total revenue against total expenses. The result is a figure that indicates whether the business is generating profit or incurring a loss.

Understanding this document helps executives to:

• Assess how profitable the business is
• Identify expenses that can be reduced
• Determine the main sources of income
• Develop strategies to improve efficiency

Basic Formula for Calculating the Profit and Loss Statement

Calculating the profit and loss statement is not more complicated than this:

Total Revenue (Total Revenue) − Total Expenses (Total Expenses) = Profit or Loss (Profit or Loss)

Here, it’s important to understand the meaning of each part:

• Total Revenue is all the money the business earns, whether from selling products, providing services, or even side income such as interest from bank deposits.
• Total Expenses are all the money the business spends, from office rent, employee salaries, advertising costs, to natural expenses and others.
• Result: If the number is positive, it indicates a profit; if negative, it indicates a loss.

Profit Layers: What Do Different Levels Indicate?

The profit and loss statement does not just provide a single profit figure but has multiple levels, each telling a different story:

###Gross Profit( Formula: Revenue from sales − Cost of goods sold

This figure shows how much the business can set prices above production costs. A high gross profit indicates that production costs are still under control.

)Operating Profit### Formula: Gross profit − Operating expenses

At this level, the impact of other expenses such as rent, travel, advertising is reflected. If operating profit remains strong, it indicates that the company is efficient in controlling overall costs.

(Net Income) Formula: Total revenue − Total expenses ###including interest and taxes(

This figure is the “actual remaining money” after deducting everything. It is the number investors are most interested in.

Let’s look at a real calculation example