How to Read an Income Statement: A Complete Guide for Investors and Entrepreneurs

If you are an investor or an entrepreneur, understanding the (Profit and Loss Statement or P&L) is a fundamental skill. This document will tell you whether the business or company is truly making money and where that money comes from.

What is P&L? Why is it important?

The Profit and Loss Statement or งบกำไรขาดทุน is a key financial document that shows the operational results of a business over a specified period (which could be monthly, quarterly, or yearly).

This document has three main sections:

• Total Revenue (Total Revenue): Money earned from selling goods or services
• Total Expenses (Total Expenses): Money spent to operate the business
• Profit or Loss (Profit or Loss): The difference between revenue and expenses

Why do managers need to review this statement?

The P&L helps you clearly see:

• Whether your business is generating a profit
• Where that profit comes from (such as Product A or Service B)
• Which expenses are too high and can be reduced
• How to adjust your business strategy to increase profitability

Once you know where the profit originates, you can plan for targeted growth.

Basic formula: simple but effective

A basic understanding of the P&L can be achieved with this formula:

Total Revenue - Total Expenses = Profit (or Loss)

If the result is positive = profit | if negative = loss

Structure of the P&L: what does each level tell us?

In reality, this statement doesn’t just sum revenue and subtract expenses to find net profit. There are multiple profit levels (Profit Levels), each telling a different story:

First level: Gross Profit (Gross Profit)

Formula: Sales Revenue - Cost of Goods Sold = Gross Profit

This figure indicates how much remains after deducting the cost of goods sold, to be used for other expenses.

Example: A company sells products worth 1 million baht, with a production cost of 600,000 baht → Gross Profit = 400,000 baht

Second level: Operating Profit / EBIT (Operating Profit / EBIT)

Formula: Gross Profit - Selling Expenses - Administrative Expenses = Operating Profit

This is the profit generated solely from core business operations (before interest and taxes).

This figure helps you assess whether “the management is doing a good job?”

Third level: Net Profit / Net Income (Net Profit / Net Income)

Formula: Total Revenue - Total Expenses (including interest, taxes, etc.) = Net Profit

This is the “most important” figure—the actual profit the owner receives after all deductions.

Structure of detailed P&L

An example of this financial statement often looks like:

Definitions of each item

• Sales Revenue: Money paid by customers for goods/services
• Cost of Goods Sold: Raw materials, labor, actual production costs
• Other Income: Interest earned from bank deposits, dividends from shares, rental income
• Selling Expenses: Advertising, marketing, transportation, commissions
• Administrative Expenses: Salaries, office rent, training, utilities

Formats of P&L presentation

There are two common formats:

1. Report Form(

Arranged in levels from top to bottom:

• Total Revenue
• Total Expenses
• Net Profit/Loss

Advantages: Easy to read, provides a clear overview, useful for analysis

) 2. Account Form###

Presented as a T-account: left side for expenses, right side for revenues

Advantages: Clear, adheres to international accounting standards, accepted by financial reporting organizations

How to read and analyze the P&L

( Step 1: Check the date and period

Verify which period the statement covers, for example:

• “Profit and Loss Statement for the year ending December 31, 2566”
• Means it shows results from January 1, 2566, to December 31, 2566

This is important because many companies’ fiscal years do not align with the calendar year.

) Step 2: Compare revenue with expenses

See whether revenue exceeds or falls short of expenses:

• Revenue > Expenses = profit ###which is good###
• Revenue < Expenses = loss (which requires caution)
• Revenue = Expenses = break-even (neither profit nor loss)

( Step 3: Track the sources of revenue

Not all income comes from core sales of goods/services. Understanding different revenue sources helps you see what the business mainly relies on, such as:

• A bank might earn more from interest than fees
• An online store might earn more from product sales than membership services

) Step 4: Analyze expenses

Check what percentage each expense category is of total revenue:

• High expenses = potential to reduce costs
• Reasonable expenses = good management

Example: If a company has 1 million baht in revenue and 500,000 baht in expenses, expenses are 50% of revenue.

Real-world analysis example

Suppose Company X reports the following for 2566:

• Total Revenue: 100 million baht
• Cost of Goods Sold: 40 million baht
• Gross Profit: 60 million baht
• Administrative Expenses: 20 million baht
• Other Expenses: 10 million baht
• Net Profit: 30 million baht

What we learn:

1. Gross profit margin of 60% → indicates a high markup over cost
2. Expenses are about 30% → well-managed
3. Net profit margin of 30% → very good return

Common mistakes to avoid

1. Only looking at net profit ← Incorrect; also consider gross and operating profit
2. Comparing absolute profits of Company A and B ← Use percentages instead
3. Ignoring other financial statements ← P&L is useful but should be analyzed alongside Balance Sheet and Cash Flow statements

Summary

The ###Profit and Loss Statement### is a vital financial document that helps investors and managers understand the financial health of a business. Proper reading and analysis enable smarter investment decisions and strategic planning.

However, do not rely solely on the P&L. Always review it together with other financial statements and consider external factors such as market conditions, management quality, and growth potential to get a comprehensive picture and make confident decisions.