A Profit and Loss statement is a report that states the profits, losses, revenues, and expenses of a business in a time period. This is usually a quarter or a fiscal year.
There are two different methods of presenting profit and loss statements. These are cash and accrual accounting.
Investors use profit and loss statements to determine if the company is doing well. Profits and losses are indicators of the company’s position in the market.
If a company generates losses, but continues to cut their losses and eventually make profits, they are doing better.
If a company makes profits, but these profits are continuously decreasing, then the company is losing market share.
The P&L statement is commonly known as the income statement.
Functions Of P&L Statements
Every quarter or fiscal year, companies that are publicly traded post three different reports. These reports are the P&L statement, cash flow statement, and the balance sheet.
The profit and loss statement shows investors various different aspects of a company’s financial position. These elements are
Revenues
Expenses
Earnings Per Share
Operating Profits
Profit Margins
Taxes
It is important to compare profit and loss statements from different dates, as the difference in the profits and losses are more meaningful than the profits and losses themselves. In the following example, we will see a profit and loss statement from ITC, and try to dissect the information presented in this report.
As we can see in this report, the company has their revenues, expenses, taxes and profits published in this report. Since March of 2017, ITC’s revenues have been steadily increasing. This is a sign of growth and shows that the company is increasing its profits as well.
Looking at the report, we can see that the profits have increased every subsequent year, apart from 2021. This decrease can be attributed to the global pandemic. The same goes for their EPS.
Their dividend rates are continuously increasing from 400% in 2017 to more than 1000% in 2021.
Looking at the financial report, we see the company is making stable profits. The company is paying handsome dividends too. These are all great signs for the company.
Profit and loss statements are important because they allow us to reach conclusions about the company’s financial position. As we see in this example with ITC, we have come to a clear conclusion, that the company is growing.
