[Hot News] [STOCKS] - What is an Income Statement, Gross Profit, Pre-Tax Profit & Net Profit of a company?

When you are dealing with the stocks of any company, there are mainly 3 statements made by the respective company that really matters to analyze the future of the stocks you hold. The three of these statements are:

Income statement
Balance Sheet
Cash Flow statement

Among the three, we will first discuss about the income statement.

When any company produces and sells any kinds of goods or services in the market, it gets paid by its buyers for those products or services normally with money. This type of money made by the company for its delivered goods or services is called the "Revenue" or the "Sales" of the company.

Normally, these income statements are made anually or quarterly by the companies for analysis to its share holders. However, under certain circumstances, it may also issue income statements by-annually or even monthly

In order to understand the income statement of a company further, let us assume a hypothetical company that manufactures and sells shoes. Let us also assume that this company made a total sale of $3,000,000 for the year 2015.

Hence the revenue of this company = $3,000,000

However this is not the true income the company has actually made! In order to manufacture these products, it would have also invested in the raw materials, labor costs etc.

Therefore, cost of Goods sold = $1,000,000

Thus the Gross Profit for the company = Revenue - Cost of goods = $3,000,000 - $1,000,000 = $2,000,000

However gross profit has not taken into account marketing expenses, sales expenses, general and administrative (G&A) expenses. Let us assume the figures for these expenses are as follows:

Marketing expenses = $500,000
Sales expenses = $200,000
G & A expenses = $300,000

Deducting this gives Operating Profit!

Therefore Operating Profit = $2,000,000 - $1,000,000 = $1,000,000 = $1m

The Operating Profit is generated by the Assets of the company.

What is a company's Return On Asset (ROA)?

If the assets costed $10 million, our Return on Asset (RoA) = $1m/$10m = 10%

Now, if we assume there is a debt of $5m on that company. If the interest for this debt is 10%, then the total interest accrued for that year would be $500,000.

Thus, the Pre-Tax Income of this company for the year 2015 = $1,000,000 - $500,000 = $500,000

Finally, if we consider the tax accrued on this profit at a rate of 30% imposed by the Govt., then the taxes imposed is:

Tax = $150,000

Thus the final Net Income = $350,000

This Net Income is what will be distributed among all the owners (stock holders) of the company.

Thus finally the Return On Equity = $350,000/$500,000 = 7% Return On Equity.

[Hot News] [STOCKS] - What is an Income Statement, Gross Profit, Pre-Tax Profit & Net Profit of a company?

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