The income statement — called the Profit and Loss account in India — answers one question: over the last quarter or year, did this business make money? It is the most-read statement and, as you will see in the cash-flow lesson, the easiest one to make flattering.
The journey down the page
| Line item | What it is | What to watch for |
|---|---|---|
| Revenue (top line) | Everything the company billed customers | Is growth from volume, from price rises, or from acquisitions? They are very different qualities. |
| Cost of goods sold | Direct cost of producing what was sold | Rising faster than revenue means input costs are not being passed on. |
| Gross profit | Revenue minus COGS | The purest read on pricing power. |
| Operating expenses | Salaries, rent, marketing, admin | Should grow slower than revenue as the business scales. If not, there is no operating leverage. |
| Operating profit (EBIT) | Profit from the actual business | The number that tells you whether the business works. |
| Interest | Cost of borrowings | Compare against operating profit — that ratio is the interest coverage. |
| Tax | Corporate tax | A rate far below ~25% deserves an explanation. Check the notes. |
| Net profit (bottom line) | What is left for shareholders | Check for "exceptional items" — one-off gains flattering an ordinary year. |
The four margins
- Gross margin
- Pricing power and production efficiency
- EBITDA
- Operating profitability before accounting and financing choices
- Operating margin
- True profitability of running the business
- Net margin
- What actually reaches shareholders after everything
Example: A typical Indian IT services firm runs 20–26% operating margins. An FMCG major might run 20–25%. A commodity steel producer swings from 25% at the top of a cycle to near zero at the bottom. There is no universal "good" margin — only good relative to the same industry and to that company’s own history.
EBITDA, and why to be slightly suspicious of it
EBITDA is earnings before interest, tax, depreciation and amortisation. It is popular because it strips out financing and accounting choices, making companies more comparable. That is a real benefit.
EPS, and the share-count trick
Example: A company can raise EPS in two ways: earn more profit, or reduce the share count through buybacks. Both raise the number; only one creates value. Always check whether EPS growth is matched by net profit growth. If EPS rose 14% while net profit rose 3%, financial engineering did most of the work.
A company reports net profit up 40%, but the notes show a ₹200 crore gain from selling a factory. Operating profit was flat. What is the honest reading?
Dukaan pe ₹5 lakh ka maal bika (revenue), maal ki laagat ₹3 lakh (COGS), bijli-kiraya-salary ₹1 lakh, byaaj ₹20,000, tax ₹15,000 — bacha ₹65,000. Income statement bas yeh seedhi ghataav ki list hai. Log sirf sabse upar ya sabse neeche dekhte hain; kahani beech ki lines mein hoti hai.
- Revenue is billing; net profit is what survives four rounds of subtraction.
- Margin trend over five years matters far more than any single year’s margin.
- Compare margins only within an industry and against the company’s own history.
- EBITDA excludes depreciation, which is a real cost for asset-heavy businesses.
- Always separate one-off exceptional items from recurring operating performance.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- difference between EBITDA and net profit
- EBITDA is earnings before interest, tax, depreciation and amortisation — operating performance measured before the cost of borrowing, the tax bill and the wearing out of assets. Net profit is what actually survives after all three have been deducted, and it is the figure EPS is built from. A company carrying heavy debt or a capital-intensive plant can show a healthy EBITDA alongside a thin or even negative net profit.
- revenue minus cost of goods sold equals
- Gross profit — and stated as a percentage of revenue it becomes gross margin. It captures what is left after the direct cost of making or buying whatever was sold, before salaries, rent, marketing, interest or tax. Gross margin is the first place to look when you want to know whether a company has any real pricing power.
- why can revenue grow while profit falls
- Because revenue is the top line and profit is only what survives every cost below it. Sales can rise because the company discounted heavily or spent more on advertising, input costs can climb faster than selling prices, or fresh borrowing can lift the interest charge. Reading the four margins in sequence — gross, EBITDA, operating, net — tells you exactly at which level the money went.
- what is a good operating margin for a company
- There is no universal figure, because margin is largely a property of the industry rather than a verdict on management. Software and branded consumer businesses routinely operate at margins that would be impossible in construction, commodity trading or airlines, where low single digits can be entirely normal. The useful comparison is against the same company’s own history and its direct competitors, never against a market-wide average.
- is the profit and loss account the same as the income statement
- Yes — Profit and Loss account is the Indian name for what is elsewhere called the income statement, and Indian filings formally title it the Statement of Profit and Loss. It covers a period, usually a quarter or a financial year running April to March, and runs from revenue at the top down to net profit and earnings per share at the bottom. The terms are used interchangeably in Indian reporting and commentary.