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How to Review Financial Statements - Income Statement

Financial statements basically are balance sheet, income statement and cash flow statement. Most of the people will probably have their focus on the income statement as what they concern is the of course the bottom line (profits). By just looking at profit will make you miss a lot of important information for you decision. Here provides you a quick and practical guide on reviewing income statement.

For income statements, the first thing to look at of course is the bottom line telling you that it the company is making a profit or a loss. It may not be that good when you see a profit and the same, it may not be that bad when you see a loss. When it is making a profit or loss, you need to know why. Where does its profit or loss come from? The term “Turnover” in the income statements signifies income from the company’s core business. For “Other revenue”, it gives you the meaning that the income can be generated from non-core but recurring income. If you see the term “Other income” or “Other net income”, they are usually non-core and very often non-recurring.

If you see majority of the income is generated from its turnover that means the company is running its core business very well. It can be a good sign as a lot of successful entrepreneur will tell a company to stay in its core business instead of always finding ways for new development. Also, it is the most stable one among “Turnover”, “Other revenue” and “Other (net) income”, that means it is least affected by other external factors. At this point, you may wish to pay attention to the growth of the core business as it is important to know that the core business is continuously growing if you are investing in the company.

If you find a significant portion of the income is generated from “Other revenue”, you need to pay attention that why the company is generating such large amount of revenue from its non-core business. What is the company actually doing?

For “Other (net) income”, it is usually considered as the garbage point for any strange revenue when they do not fit into “Turnover” or “Other revenue”. Pay special attention to it if you found a significant portion as other (net) income is usually non-recurring and what you earn in this year maybe loss in next year, which can cause a great turn in the bottom line of the income statement.

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