How To Analyze an Income Statement

Hello everyone, my last video talking about balance sheets has the highest ratio of likes to dislikes on my entire channel, so thank you very much to everyone who liked that video and now I want to talk about

income

statement

s, which is another of the three key financial issues.

statement

s when looking at companies, so the purpose of an

income

statement is to show you the profits or losses a company generates. Income statements also show you the company's gross and operating margins, which are also very important numbers to know. You may have heard the terms top and bottom lines and the income statement is also where these two numbers come from so there are quite a few key numbers that we need to look for on the income statement so just like my video of balance, I want to jump into some real-world examples to show you some income statements and some red flags we can all watch for, so let's jump right into it.

Okay, so for this video we're going to use Yahoo Finance one more time and just look at Delta Airlines one more time, so when we search for Delta and Yahoo Finance, this is the page we come to, so let's just click on finance and go to the status income statement, which should be the first when you get to financials, so when we scroll down, we can take a look at the income statement and keep in mind that all of these figures are reported in thousands, so when we see the income Totals here may look like 47 million dollars, but they are actually 47 million thousand, which is 47 billion they simply do this to eliminate three extra zeros on the income statement.

Another thing I want to point out is that TTM means trailing twelve months, so when you have this 2019 at 1231, this number here represents the year ending December 31, 2019 and In the case of Delta right now, the Last twelve months are the same as year-end 2019, but when Delta reports its next quarterly results, the last twelve months will be different from 2019, so I hope it makes sense, but now from the beginning. At the top of the income statement we have the total revenue that the company has generated, so this total revenue number is the total amount of revenue that the company generated before paying any operating expenses and then the next line down is the cost of revenue, so the cost of Revenue is the total cost of manufacturing and bringing a product or service to customers, so you have to think that every company has a lot of different expenses that are required to actually generate the revenue of the business and then below the cost of revenue we have the gross profit and What is gross profit is essentially the amount of money left after paying all the costs of revenue and the gross profit is calculated simply taking the total amount of revenue minus the cost of that revenue and you are left with your gross profit. profit Your gross profit is also what you use to find your gross margin, so if we pull out the calculator we can do an example so we can take Delta Airlines' gross profit, which is approximately ten point three billion dollars and we can divide that by The total revenue that the business generated is a little over forty-seven billion dollars and when we divide the gross profit by the total revenue we get point two 2 and if we multiply this number by 100% we get 22 percent, so if we round this up The number would be twenty-two point one percent and this twenty-two point one percent is Delta's gross margin, but now let's go down to the operating expenses, so here we have the selling and administrative expenses so we can go directly to investopedia and see the definition of sale.

General and administrative expenses, so Investopedia says that selling general and administrative expenses or SGA are reported on the income statement as the sum of all direct and indirect selling expenses and all general and administrative expenses. A company's RNG, also known as SGA, includes all costs. It is not directly related to making a product or providing a service, i.e. RNG includes the costs of selling and delivering products and services and the cost of running the business, so SGA includes things like marketing and payment to all of their employees, so we can see it here. On Delta's income statement, they say they spent just under two billion dollars on selling general and administrative expenses.

Now, if you want to know exactly how much you spend on different things, you're going to have to go to Delta's website and look at their Assumed Actual Income Statement where they break down all of these numbers even further, so what Yahoo Finance does is it just takes all of these expenses. and add them up in a nice place, so just go to Delta's reported income statement if you want to find the details. about what they are spending their money on and I also want to let you know that some other companies on Yahoo Finance will have more operating expenses.

In Delta's case, they are only selling G&A here on Yahoo Finance and just below. SGA we have the total operating expenses and for Delta we can see that their total operating expenses are approximately 3.7 billion dollars, so what we can do here is take 3 7-6 4 and minus 1 9 9 3, which are these SGA expenses for Delta and we are left with about $1.7 billion that is not reported here on Yahoo Finance, so if you want to go and find out what this other $1.7 billion of operating expenses are again you will have to go to Delta's income statement. but again, Yahoo Finance is accurate when it reports its total operating expenses, so this $3.7 billion number here that you can rely on is fine and then the next line here is operating income or loss and in the case of Delta here we can see that they have six points. six billion dollars in operating income, so if this number here was negative six point six billion dollars, then that would be reported as an operating loss, but since this number is not negative, it means that the business actually generated operating income, so how do you earn your operating income? income as you take your gross profit and you - all your total operating expenses, so I can show you an example here if we take ten 3a2 for Delta's gross profit and subtract the total operating expenses from three seven six four we are left with six point six billion dollars, which is exactly the number we're looking at here.

The operating profit or loss is also the number that is used to find the operating margin of the business, so the same thing we did here to find the gross margin we can also do to find the operating margin, so all we have to do is take six six one eight and divide that by the total amount of revenue that Delta has generated in a year, so in this case again it's a little over forty seven billion dollars and when we do this calculation we get point four zero, so we multiply this by a hundred percent and we get fourteen point zero percent and this would be the operating margin for Delta and I want you to know that a typical good operating margin is around fifteen percent, which is kind of the average operating margin. that a company generates, and the higher the operating margin, the better for the company, so let's think about this, if Delta is generating $47 billion in revenue as a shareholder.

We'll want Delta to keep most of this total revenue as profits for the company, so if its total operating expenses were incredibly high, it means that the company doesn't actually keep most of the money it generates as profits. . For example, if Delta's total operating expenses were like $20 billion, then the company would be operating at a loss because the total operating expenses would be greater than the gross profits that the business is actually generating and, on the other hand, if the Delta's total operating expenses were only $1 billion, then the company would be generating higher operating income, which means the company would be generating higher profits, so that's why you need to pay attention to your operating margins because it tells you how much of total revenues are actually profits. for the business so I hope it all makes sense and we'll get into some companies that have terrible operating margins and I'll show you what that looks like okay so now let's continue down the income statement so here we have our interest expense and literally what this is is the amount of interest that the company has paid, so in the case of Delta here we can see that they have paid $301 million in interest in the last 12 months and this interest expense could be the interest on bonds loans lines of credit pretty much anything, any interest that the company had to pay will be reported right here and then the next line down is the total other net income or expenses and for this one I also have a definition, so it says definition of other income or expenses income and expenses generated or lost from sources not directly related to the main operations of a company, so essentially this number is other expenses or income that the company has generated that are not directly related with the core operations of the company, so this could really be many different things and in the case of Delta they generated a negative 119 million dollars, so in the case of Delta this is an expense and not an income since this number is negative and then the next line is the income before taxes and the reason why this number is correct.

This is because you take the operating income or loss and subtract the interest expense and then also add the other income or expense and then the next line down is the amount of tax that Delta has to pay on the income it generated. Here we can see that Delta had to pay 1.4 billion dollars in income taxes and then the number left over is the actual income from continuing operations, so after paying all of its taxes, Delta generated about four point seven billion dollars in net income, so now I want to tell you what the top line number is because it's a very used phrase in the investment world, so when you hear someone say the top line number, it's literally the total amount of revenue that the company generates and They call it the top line number because when you look at an income statement it is literally the top line, so since the top line is literally the top line of the income statement, The bottom line is also literally the bottom line, which is the net income, so when you hear someone say that it helps their bottom line or that it increases their bottom line, it just means that it increases their net income or the amount of money they make. the business really generates.

Okay, now that we've gone over the income statement, let's take a look at what we really need to look for and what is considered good or bad on the income statement. The first thing to look for is operating income or loss, so you definitely want operating income to be positive. number because if the operating income is a negative number it means that the business is generating a loss and not a profit, then in the case of Delta here we can see that the operating income is a positive number, so the business is actually generating money and the same.

This applies to the net income number, you want the net income number to be positive and the next thing you'll want to do is take a look at the historical numbers here. Yahoo Finance only goes back four years and if they can find them. a program that dates back 10 years. I would recommend looking back 10 years. The program I used to find my 10 year financial statements is Quest Rate which is my broker and on Quest Trade you can see they go back to 2010. if they are in mission trading then they have access to this and if they are not in missions trading, I would recommend finding a place where you can look back the full 10 years.

I just want to show you Yahoo Finance because it is a free platform that many traders like me use, so in the case of Delta here we can see that in 2016 they generated 239 billion dollars in revenue, 2017 it was 41 billion, 2018 it was 44 thousand million and 2019 was 47 billion, so the total amount of revenue that Delta is Power generation is constantly increasing year after year, but now let's take a look at its gross profit so we can see that the gross profit in 2016 was ten point six billion and in 2017 it was 10.1 billion and in 2018 it was eight point nine billion and in 2019 it was ten point three billion, so, although Delta generated around eight billion dollars more in 2019 than in 2016, we can see that in 2016 Delta generated a higher gross profit than in 2019 and this is simply due to Delta's cost of revenue in 2019, so what?

What it tells me is that in 2016 Delta had higher gross margins than they have today and now let's take a look here at theoperating income or loss and we want to see if this number is also constantly increasing, so if in doubt, we can see that in 2016 they had operating income of six point nine billion, that is, just under seven billion and then they went down to six point billion in 2017 and then even further to five point two billion in 2018 and now it has risen again here to six point six billion, but six point six billion is still below six point nine billion that they generated in 2016, so in the case of Delta you can see that their operating income was declining, but now they are starting to go back up and then when we take a look at Delta's net income in 2016, they had four points three billion, in that case 2017 revenue was 3.5 billion, 2018 was three point nine billion and then 2019 was four point seven billion, so Delta's net income is actually higher in 2019 than in 2016 and if we take a look at the financials, we can see that it is most likely due to this income tax expense, so Delta only had to pay one point four billion in income taxes in 2019, while in 2016 they had to pay two point two billion, so this tells me that Most likely, the tax that airlines have to pay has gone down from 2016 to 2019 and given that their tax expenses income are lower, it means that the business is now generating higher net income, so this is one way they can use an income statement to look around and see what the actual expenses are.

Now I want to show you how a bad income statement works and I'm going to I have to take a look at uber z's income statement to show it right away and we can see that uber z's total revenue in 2016 was $3.8 billion and in 2019 They were 14.1 billion, in terms of income. uber is generating a lot more revenue in 2019 than in 2016, so let's move on to the gross profit, so in 2016 uber had a gross profit of 1.6 billion and in 2019 it had a gross profit of six point nine billion, so Their gross profits are also increasing very dramatically, but when we come down to operating expenses, this is where things start to get a little worse, so let's take a look at operating income or losses so that in 2016 we can see that Uber was generating a loss of three billion dollars and now so far in 2019 they are losing eight point five billion and this is only due to their operating expenses in 2019 uber had 15 billion dollars in operating expenses versus their operating expenses of 4.6 thousand million in 2016, so even though Eber's total revenue is increasing significantly, its operating expenses are also increasing significantly and in fact, they are increasing faster than the company is generating new revenue and that is why you see that your operating income is continually growing and getting bigger and bigger, so I know I might be offending some people here because I know Huber is kind of a polarizing company where people either love it or hate it, but I don't mean Uber like an investment, I just mean look at your income statements and show you what I see and this is one of the red flags that I want to point out is when the company's revenue increases but its operating income decreases because it just means that the business is generating more income but the actual profits that the business generates keep going down and down, so they have to pay more and more to generate this income, you know what?

Now that I'm looking at this, Ubers total operating expenses are actually greater than their total revenue, so Uber is paying more in operating expenses than the company actually generates, so this is actually a sign of Pretty big red flag and this is the kind of thing you can identify when you take the time to review some income statements. So now I want to show you a fantastic income statement because Delta's had ups and downs and then a super x case, revenue was increasing and operating income was continually decreasing, so now I want to show you Google's income. statement because this is a phenomenal income statement so from the beginning here we can see that the top line or total revenue is increasing dramatically year over year in 2016 they reported 90 billion dollars in total revenue and then here in 2019. and up to one hundred and sixty billion, which is a massive increase and we can also see that the gross profit is also increasing.

They made it 55 billion in gross profits in 2016 and eighty-nine point nine billion in 2019. Let's go down to operating income or loss and we can see that in 2016 Google was generating 23 billion in operating income and here in 2019 they are generating just under of 36 billion, so Google is a business where total revenue is increasing and its operating income. It's also increasing with that total revenue, so this is what you want to see in a business as operating income; You want to see total revenue and total operating income increase together because it means that as the business's revenue continues to grow, the profits that the business receives are growing with it and that is what they want to see on the income statement, and that's practically the end of the video.

If you haven't seen my previous video on balance, I would recommend that too. I'm going to watch it to learn more about companies' financial statements. I also want to let you know that I've been getting a lot of requests lately to create some kind of course or additional content for you guys to learn how to

analyze

companies and do everything, and I'm actually creating a course as we speak that will cover everything from the basics of investment to how to invest in your first business and how to

analyze

companies with confidence, so the course is in the works for those of you who are ordering it and I hope to have it finished probably before the end of May.

I'm working hard on it and I want it to be the best course possible, so expect some kind of announcements on my channel. before the end of May if you want to get a copy and with all that being said if you enjoyed this video remember to leave a like. I really appreciate it and it really helps grow my channel and if this is your first time on my channel and you want to see more content like this then consider subscribing because that would be awesome too and that will conclude the video so thank you so much for watching and I really hope to see you again next time.