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Income Statement Analysis for Stocks

Income Statement Analysis for Stocks

When you are investing in stocks, it is important to understand how companies are performing financially. One way to do this is by analyzing the income statement. The income statement shows a company's revenue and expenses over a specific period of time. By understanding how these figures have changed over time, you can better understand whether or not the company is doing well financially. In this guide, we will walk you through the steps of income statement analysis for stocks!

What is an income statement, and why is it important for stock analysis?

The income statement is one of the three most important financial statements for stock analysis, along with the balance sheet and cash flow statement. The income statement shows a company's revenue and expenses over a specific period of time. The reported revenue minus the reported expenses equal the net income.

There are 2 types of analysis that can be performed on the income statement; vertical analysis and horizontal analysis. This information can be used to assess a company's financial health and determine whether or not it is a good investment.

At the end of the day, stocks are companies whose purpose is to generate a profit for their shareholders. The income statement is the best place to start when understanding a company's profitability.

The different components of an income statement

You can find several items on an income statement.

Revenue (top line)

Revenue: This is the total amount of money a company has brought in during the reported period.

Expenses (middle to end of statement)

Cost of Goods Sold (COGS): This is the cost of the goods or services a company has sold during the reported period.

Gross Profit: This is the difference between revenue and COGS. It represents the amount of money that a company has made from selling its products or services before expenses.

Operating Expenses: These are the costs incurred to run a company's day-to-day operations, such as rent, insurance, etc.

Selling, General, and Administrative (SG&A) expenses: These are the costs of selling a product or service, and the costs of running the company on a day-to-day basis. This includes salaries and advertising.

Research and Development (R&D) expenses: These are the costs associated with developing new products or services.

Depreciation and amortization: These are the costs of wear and tear on a company's equipment and buildings.

Interest expense: This is the cost of borrowing money.

Other expenses: This can include items such as legal fees or restructuring charges.

Operating Income: This is the difference between gross profit and operating expenses. It represents the amount of money a company has made from its core business operations.

Non-operating Income: This is income that is not related to the core business operations of a company.

Other income (before the bottom of the income statement)

Interest income: This is income earned from investing cash or from lending money to others.

Gains (or losses) on investments: This is income (or loss) earned from buying and selling assets.

Other income (or loss): This can include items such as foreign currency gains or losses.

Net income or profit (bottom line)

Net Income: This is the difference between operating income and non-operating income. It represents the bottom line profit (or loss) of a company.

EPS (Earnings per Share): This is net income divided by the number of shares outstanding. EPS is a measure of how much profit each share of stock generates.

Several other items can be found on an income statement, but these are the most important ones to understand.

Altogether an income statement for a public company like Apple looks like this:

Apple's quarterly income statement
Data from Wisesheets

Now that you know the structure of the income statement and its different parts, it's time to analyze it.

How to analyze the income statement for a publicly traded company?

You can perform two types of analysis on an income statement: vertical analysis and horizontal analysis.

Vertical Analysis

Vertical analysis is a method of financial statement analysis in which each line item on the statement is represented as a percentage of a base figure within the statement.

For instance, if we wanted to do a vertical analysis of Apple's income statement, we could express each line item as a percentage of revenue. This would give us a good idea of how much each item contributes to (or takes away from) the company's overall profitability.

To do a vertical analysis, we simply need to express each line item on the income statement as a percentage of revenue.

For example, Apple's gross profit for the fourth quarter of 2022 was $52.051 billion. You can express this as a percentage of revenue by dividing it by the total revenue for the quarter ($90.146 billion) and multiplying by 100 (to get a percentage). Doing this gives us a gross profit margin of 42.26%.

This means that for every dollar of revenue Apple brings in, 42.26 cents is left over as gross profit. We can do this same calculation for each line item on the income statement to get a better idea of how much each item contributes to (or takes away from) the company's overall profitability.

This income statement analysis method is most effective when you compare the items as a percentage of revenue for multiple periods to spot trends in the likely direction of the numbers.

Apple Income Statement Analysis
Data from Wisesheets

Horizontal Analysis

Horizontal analysis is a method of financial statement analysis in which each line item on the statement is compared against a previous time period to find trends and growth patterns.

For instance, if we wanted to do a horizontal analysis of Apple's income statement, we could express each line item along with its growth or decline from the previous period. This would give us a good idea of how much each item has increased or grown over time.

To do a horizontal analysis, we simply need to analyze the changes in the financial statement items over time.

For example, Apple's revenue in 2022 was $394.328 billion, whereas, in 2021, it was $365.817 billion. You can express this as a percentage change of 7.79%.

This means that in 2022 Apple grew its revenues by $28.511 billion or 7.79%.

Apple's income statement horizontal analysis

We can do this same calculation for each line item on the income statement to get a better idea of how much each item has grown or declined over time.

Using Wisesheets, you can automatically get the data for this type of analysis by simply changing the company's ticker.

How to get the income statement automatically for companies in Excel and Google Sheets?

Performing the income statement analysis outlined above is much easier when you can get the income statement or the data directly on your spreadsheet. From there, you can perform any calculations and decide whether you'd like to invest in a particular company.

Luckily with the Wisesheets add-on, you can simply enter the company ticker on the statement dump search. Select annual or quarter to get the income statement, balance sheet, cash flow statement, key metrics, and growth metrics on your spreadsheet.

Excel stock add-in

Better yet, you can create a spreadsheet template like this that gets you only the financial items you are interested in analyzing and automatically performs the calculations you'd like.

Excel stock analysis template

This works by using the WISE and WISEPRICE functions which allow you to dynamically retrieve all the data listed here for 50,000+ global stocks. You can try it for yourself for free here.

Examples of how to use the information from an income statement to make investment decisions

Coke vs. Pepsi

Let's say we're looking at two companies, Coke and Pepsi.

We pull up their income statements and see that in 2021 Coke has a gross profit margin of 31.13%, while Pepsi has a gross profit margin of 53.35%.

pepsi vs coke financial comparison

At first glance, it might look like Pepsi is the better investment because they have a higher gross profit margin. However, we need to look closely at the rest of the income statement to better understand which company is more profitable.

When we do this, we see that Pepsi has a profit margin of 9.54% while Coke has an operating margin of 3.41%. So, as you can see, Pepsi is more profitable than Coke because they have a higher margin after all of its expenses are considered. However, Coke has about 40 times the income, making a lot more profit on lower margins.

Mcdonalds vs. Restaurant Brands International Inc (Burger King)

Another example, let's say we're looking at two companies, Mcdonalds and Restaurant Brands International Inc (Burger King)

McDonalds vs Restaurants brands international financial comparison

We pull up their income statements in 2021 and see that Restaurants Brands International Inc has a gross profit margin of 41.7% while Mcdonald's has a gross profit margin of 54.17%. So, at first glance, it might look like Mcdonald's is the better investment because they have a higher gross profit margin.

However, we need to look closely at the rest of the income statement to better understand which company is more profitable. When we do this, we see that Restaurants Brands has a profit margin of 14.6% while Mcdonald's has an operating margin of 32.49%.

Therefore you can conclude that Mcdonald's has a higher gross profit margin and is more profitable because they have a higher margin after all of their expenses are accounted for.

As you can see, it's important to look at the full income statement when you're trying to decide if a company is a good investment or not. You can't just focus on one number because that number might not tell the whole story.

Conclusion

An income statement is one of the most important financial statements you can use to analyze a company. It shows you how much revenue a company generates, how much money they spend, and how much profit they make. You can use this information to compare companies and make investment decisions.

When you're looking at an income statement, it's essential to pay attention to the gross profit margin, the operating margin, and the net margin. These numbers will give you a good idea of how profitable a company is. You should also look at the total revenue, total expenses, and total profit to get an idea of the big picture.

Remember, you can't just focus on one number when you're trying to analyze a company. You need to look at the complete income statement to get an accurate picture of a company's profitability.

To your investment success!

Guillermo Valles

Guillermo Valles

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing deals and learning the ropes.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies. That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

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