Why do investors need to read the (Profit and Loss Statement)?

For those interested in investing or tracking a company’s performance, the most important thing is to understand where the company’s profits or losses come from and whether they can be sustained for a long time. This is why the Profit and Loss Statement is an essential document that everyone should know and understand, whether you are an executive, an investor, or simply someone interested in the company’s financial status.

What is a (Profit and Loss Statement)?

The Profit and Loss Statement, also called P&L or Profit and Loss Statement, is an accounting document that summarizes the results of business operations over a specified period, whether monthly, quarterly, or annually.

This document shows:

• How much money the business has received (Revenue)
• How much has been spent (Expenses)
• After deducting all expenses, how much profit or loss remains (Net Income)

The importance of the Profit and Loss Statement does not lie solely in the numbers but in what it tells about the business — whether management is heading in the right direction, if the company is profitable, and what areas need improvement.

Basic Calculation Principles

The mathematical formula behind the profit and loss statement is very simple:

Total Revenue − Total Expenses = Profit or Loss

If the result is positive, it indicates a profit; if negative, it indicates a loss during that period.

Detailed Breakdown of the Profit and Loss Statement

In practice, the profit and loss statement is not that simple. It is divided into several steps to give an overview of different aspects of operations:

What does each level of profit tell us?

###Gross Profit( Tells you whether, after selling goods and deducting production costs, there is still a profit. If gross profit is low, it may mean production costs are too high or selling prices are not high enough.

)Operating Profit### This level indicates whether, after deducting selling, administrative, and other income expenses, the core business can generate profit. This figure is very important for evaluating operational efficiency.

(Net Income) This is the “bottom line” ###Bottom Line( — the figure everyone cares about because it shows how much profit remains after everything, the true profit of the business.

Two formats of presenting the profit and loss statement

) 1. Report Format (Report Form) This method arranges data in a linear sequence from total revenue down to net profit, like telling a story from start to finish.

Advantages:

• Easy to read and understand immediately
• Clear structure, suitable for beginners
• Shows cash flow clearly

2. Account Format (Account Form)

This method divides the page into two sides — left and right. The left side shows expenses, and the right side shows income, similar to a balanced scale.

Advantages:

• Shows the balance between income and expenses
• Recognized by government agencies and financial institutions
• Formal and trustworthy

When should you read the profit and loss statement?

First: Check the period Often, misinterpretation occurs because the period is not specified. For example, a quarterly profit and loss statement differs from an annual one. Read carefully.

Second: Where does the income come from? Look at the sources of revenue. Which are main sources? Which are supplementary? If supplementary income is too high, it may indicate that the core business is weak.

Third: Analyze expenses Expenses come in many types. If any expense category is unusually high, it’s necessary to investigate whether there is a valid reason or a warning sign.

Fourth: Compare with previous periods Don’t look at just one period. Observe trends over multiple periods. Are profits increasing or decreasing? Is the trend positive or negative?

Conclusion: Why is this important for you?

The Profit and Loss Statement is one of the most important financial documents because it tells the real story of the business — not just words or promises.

Whether you are:

• Investor — to decide whether to buy shares
• Business owner — to monitor if your business is strengthening
• Analyst — to provide informed advice
• Student — to learn how to think and analyze

Understanding the profit and loss statement is opening the door to understanding the world of finance and business. Next time you see a company’s profit, expenses, or revenue figures, you will be able to interpret what they mean, and that is the power of knowing how to read a Profit and Loss Statement.