How To Do Income Statement Analysis

Income statement analysis investors can use income statement analysis to calculate financial ratios that can be used to compare the same company year over year or to compare one company to another.

How to do income statement analysis. Vertical analysis refers to the analysis of the income statement where all the line item which are present in company s income statement are listed as a percentage of the sales within such statement and thus helps in analyzing the company s performance by highlighting that whether it is showing upward or downward trend. The income statement also known as the profit and loss p l statement is the financial statement that depicts the revenues expenses and net income generated by an organization over a specific. A balance sheet vertical analysis is used in the same manner as the income statement. The analysis of the income statement involves comparing the different line items within a statement as well as following trend lines of individual line items over multiple periods.

This analysis is used to understand the cost structure of a business and its ability to earn a profit. To prepare an income statement small businesses need to analyze and report their revenues expenses and the resulting profits or losses for a specific reporting period. The income statement also called a profit and loss statement is one of the major financial statements issued by businesses along with the balance sheet and cash flow statement. It can be used to show the percent any of the line items are of your total assets.

In order to perform this exercise you need to take the value in period n and divide it by the value in period n 1 and then subtract 1 from that number to get the percent change. If you have more than one year of financial data you can compare income statements to see your financial progress. For example you can compare one company s profits to its competitors by examining its gross profit margin operating profit margin and net profit margin. Common size income statement analysis states every line item on the income statement as a percentage of sales.