Profit and Loss Statement (P&L)
All companies must generate revenue to stay in business. It is used to pay expenses, taxes to local, state, and federal governments, and interest payments on debt. Once the costs of doing business are paid, what's leftover is called net income which is, in theory, available to shareholders. Often the decision is made to retain earnings for growth and future investments in the business instead.
Also referred to as an income statement, statement of earnings, statement of income, or statement of operations, a P&L statement summarizes a company's revenues and expenses over a reporting period, most commonly a year.
P&L statements follow the same outline, regardless of the company’s line of work. It begins with total revenue from which costs of goods sold are deducted, leaving the company's gross profit. Operating expenses such as salaries, utilities, rent, appreciation, and interest expenses are deducted from the gross profit leaving what's known as the operating profit. Taxes are then deducted leaving the net income for the business.
Why is a P&L important?
A P&L statement is key to investigating the financial health of a company because its ability to generate earnings over the long-term is a vital driver of stock and bond prices. If a company is unable to generate enough revenue to pay its debt obligations, it must enter bankruptcy or be sold. Conversely, a company that is healthy and growth-oriented will have higher stock and bond prices that reflect its increased availability of profits.
Keep in mind that earnings, net income, and/or profits are not the same as cash or cash flow. It is possible for a company to be profitable on a P&L statement, yet not generating cash flow and vice versa. To understand a company's cash flow, you must examine the statement of cash flows.
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