Dissecting Income Statement
by: Hari Wibowo
Knowing income statement real well is critical to your investing success. Income Statement is crucial in determining the fair value of a common stock. Why? Because I believe that the fair value of any investment is determined by the return it can generate for a given price. If a common stock is trading at $ 100 and it earns $ 4 annually, then it is yielding 4%. If a treasury bond is yielding 5% right now, who would want to buy a common stock which yields only 4%? To be honest, there are probably some investors out there who will buy stocks at any price. However, this type of investing is seldom profitable.
Analyzing income statement will tell us how much profits a company can earn. This will in turn tell us how much percentage return we can expect. So, without further ado, let us go through the components of a typical income statement.
Revenue. Also called sales, Revenue is the lifeblood of a company. To earn revenue, a company has to sell. For retail companies like Walmart, you have to sell items at the stores. For service companies such as H&R Block, it has to sell its expertise to tax filers.
Cost of Revenue. Sometimes called Cost of Good Sold, Cost Revenue is the direct cost of providing a particular good or service to customers. For example, the cost of selling one can of soda at Walmart is the price it bought the soda from manufacturers.
Gross Profit. This is the difference between the price of good or service that a firm sells and the cost of providing that particular good or service. In other words, it is the mark up that a firm impose on its customers. For example, if Walmart sells a can of soda for $ 1.00 while it costs $ 0.60 from the manufacturer, then gross profit of Walmart for selling that can of soda is $ 0.40. When gross profit is expressed in term of percentage, it is called gross profit margin. In this case, gross profit margin of Walmart is ($0.40/ $ 1.00) x 100% = 40%.
Research & Development.This is the cost of doing research in order to provide future revenue or cost improvement. Either way, it is designed to boost the firm's future profit. For example, Walmart may spend certain dollars in order to improve its inventory management, which in turn will reduce cost of operating its business.
Selling General & Administrative. This is a really broad category. Basically, this is the fixed cost of doing business. Marketing expense, office rent, manager and the CEO's salary is included here. So do depreciation and amortization expense. For your information, depreciation expense is the expense incurred every year for buying a long-term assets such as machinery or vehicle. Amortization expense is the expense incurred for obtaining goodwill, which is obtained from acquiring companies above its net asset value. When a company is considering layoffs, it is this cost that they are trying to reduce.
Operating Income. This is the difference between gross profit and operating expenses. Operating expense here is the total cost of research development and selling general & administrative. Operating income can be thought as the income generated as a result of a firm's primary business activities.
Other Income/Expense. This is the income earned or expense incurred outside of the firm's business activities. For example, capital gain on sale of asset or expense incurred due to lawsuit punitive damage.
Interest Expense. This is the expense incurred from borrowing long term debt. A firm gets additional funding by borrowing money. In turn, it has to pay interest for the loan. This interest is called interest expense.
Income Before Tax, Income Tax Expense. Once you take out all the other income/expense and interest expense from operating income, you get income before tax. A profitable firm has to pay tax on this income. The tax paid by the firm is found in the income statement under category income tax expense.
Net Income. This is our final destination. This is the reason why we go through all the components of an income statement. Also known as net profit, net income is what a company earns at a specific time frame. From here on, you can then calculate the fair value of the firm. Does it yield less than 4% treasury bond, which is considered safe haven? If so, the common stock definitely needs to be sold or avoided.
Please note that each companies have different ways of presenting their income statements. However, most companies present them similar to the above criteria. If some companies give a totally different ways of presenting their financial performance, it is best to ask them questions or avoid the common stock altogether.
About The Author
Hari Wibowo Other helpful commentary can be found at http://www.noviceinvesting.com all for free.
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The Person With The Most Money Wins!
The Person With The Most Money Wins!
by: John Michael
The person with the most money wins! This phrase has been used repeatedly but not by the wealthy but by the poor "The have not's".
Money is not the only or even the most important thing in life.
You number one goals should be when it comes to life is:
- Good health
- Take care of Family
- Ability to enjoy life
- Happiness both for yourself and others around you
The above should be at the top of the list of any goal you have. However, wealth does make substantial improvements to each of the four areas of life listed above.
More money can mean better:
- Health Care
- Relaxing Vacations and Adventures
- Education for your children or yourself
- Better home than you have now
Best of all it can reduce stress from not having to worry about money!
Many of us have problems in life...
The Person With The Most Money Wins!
Tax help > The Person With The Most Money Wins!
Dissecting Income Statement
Dissecting Income Statement
by: Hari Wibowo
Knowing income statement real well is critical to your investing success. Income Statement is crucial in determining the fair value of a common stock. Why? Because I believe that the fair value of any investment is determined by the return it can generate for a given price. If a common stock is trading at $ 100 and it earns $ 4 annually, then it is yielding 4%. If a treasury bond is yielding 5% right now, who would want to buy a common stock which yields only 4%? To be honest, there are probably some investors out there who will buy stocks at any price. However, this type of investing is seldom profitable.
Analyzing income statement will tell us how much profits a company can earn. This will in turn tell us how much percentage return we can expect. So, without further ado, let us go through the components of a typical income statement.
Revenue. Also called sales, Revenue is the lifeblood of a...
Dissecting Income Statement
Tax help > Dissecting Income Statement
Real Estate: A Strong Investment
Real Estate: A Strong Investment
by: Naomi Warne
Description: Even in uncertain economic times like these, history shows that real estate is one of the soundest investments a family can make. Also remember that the stock market is not the only place where people can make their fortunes. And also, you?ll hardly ever hear of real-estate investors who?ve gone bankrupt, unlike stock market investors.
Even in uncertain economic times like these, history shows that real estate is one of the soundest investments a family can make. During the Great Depression of the 1930s when the stock market plummeted as much as 89 percent, housing prices dropped only 39 percent. So, according to most of the research on housing trends, prices continually stay at the same level as, and most often appreciate faster than the rate of inflation. In fact, the prices of houses actually increased by 10 percent during the economic recessions of the mid-19702 and the early...
Real Estate: A Strong Investment
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How Do I Prepare for Retirement?
How Do I Prepare for Retirement?
by: Stuart Simpson
When the day finally arrives, will you be ready?
What do you need to do?
How do you need to prepare?
Well, if you are over 10 years from retirement, then just sock away tons of money in your 401k for now.
This article is focusing on people a little closer to retirement.
So you are about 10 years from retirement.
What should you do?
What should you look at and what things will come up that you typically don?t think about while you are working?
There are 5 guidelines for you to look at to prepare your financial retirement.
Do you have an emergency fund?
Some experts say you should hold between six and 10 months worth of living expenses.
When we were younger, that seemed ludicrous.
How could you save so much and be expected to eat?
We had kids to raise and educate.
But now, think about...
Tax help > How Do I Prepare for Retirement?
Self Employed Mortgage Loan ? Getting a Mortgage When You?re Self Employed
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by: Carrie Reeder
Being self employed has many benefits.
When you are self-employed, you can write off all of your deductions on your taxes.
You have the potential to make more income than someone who is employed by someone else.
You have the freedom to be your own boss.
One of the few times when being self employed has some drawbacks is when you go to get financing for a home or a major purchase.
But, here are some things to know that can help you make the mortgage loan process run smoothly when you are self employed.
When verifying income - In general, lenders want to see at least 2 years of self employment history, sometimes they want to see 3 years.
They will want to see this history verified in tax returns, usually.
Sometimes the lenders will figure your income as being the average income you claimed on...
Tax help > Self Employed Mortgage Loan ? Getting a Mortgage When You?re Self Employed
A Financial ?To Do? List for Engaged Couples
A Financial ?To Do? List for Engaged Couples
by: Nathan Dawson
Engagement can be a hectic and overwhelming time for all parties involved. However, by setting a wedding budget and by creating a long-term money-management plan, you can ensure that you will start off on the right foot. Follow these steps for a good marriage preparation:
1. Prepare to merge finances
Discuss your spending and saving habits, your debts and assets and your respective salaries. Be sure that you have a realistic idea of how marriage will affect you both as a couple and as individuals.
2. Plan your wedding
Make a realistic assessment of how much you can spend. While the average wedding cost is $15,000, with careful planning you may be able to go lower than that and create memories that will last forever.
3. Decide on whether to have a prenuptial agreement
Prenuptial agreements aren?t always necessary. However, if there is a considerable difference...
A Financial ?To Do? List for Engaged Couples
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What Is HDTV?
What Is HDTV?
by: Frank Johnson
Some satellite TV providers, such as Dish Network, offer HDTV receivers with their packages. But many people don?t know what it means to have HDTV. Here is some insight.
High Definition TeleVision is what HDTV literally means. But high definition compared to what? In order to answer this question, we need to know a bit about the original analog TV system.
Analog TV
30 images per second (in Europe 25) are shown...
hdtv Tax help Dissecting Income Statement
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Your Guide to Credit Repair Services
Your Guide to Credit Repair Services
by: Morgan Hamilton
There are many people today that are in great need of having their credit repaired. There can be many reasons why people need there credit repaired. Some people have bad credit due to medical bills. Some people just made poor spending decisions. Some people were victims of credit fraud. Some people just had no idea there was even a problem with their credit until they tried to apply for something. Whatever...
Tax help Dissecting Income Statement
Tax help > Your Guide to Credit Repair Services
Garden Leaf Blowers - More Power to Your Elbow
Garden Leaf Blowers - More Power to Your Elbow
by: Leonard Mutch
Garden leaf blowers are powered generally either by gas or electric. Our article below will guide you to make the best choice of leaf blower for your portability needs, and garden size.
Gas Leaf Blowers
These are more powerful (and noisier) than electric ones, and with a reach beyond the limits of an extension cord. Two-cycle engines require a mix of gas and oil. Gas powered leaf blowers...
Tax help Garden Leaf Blowers - More Power to Your Elbow
Tax help > Garden Leaf Blowers - More Power to Your Elbow
Hypnotize the Pounds Away: Weight Loss Motivation Through Hypnosis
Hypnotize the Pounds Away: Weight Loss Motivation Through Hypnosis
by: Lyta Humphris
Many individuals these days, male or female, young or old, are struggling with weight management. Concerns with rising cases obesity are no longer based upon a Hollywood conception of what is the appropriate body size. Instead of doctors wanting their patients to be "thinner", they want them to be healthier. The patients, however, are not necessarily discerning the difference.
What...
Tax help diets
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Contemporary Furniture Trends
Contemporary Furniture Trends
by: Kathryn Whittaker
Fashion trends no longer dictate the way we dress or decorate our homes. Eclecticism and contrasting style directions reign in home design. More and more people develop a taste of mixing contradictory furniture trends in their home decor, combining contemporary furniture with vintage finds and exotic art pieces.
Uncertain economy, the rise of natural disasters, persistent war conflicts and terrorist threats...
Tax help Contemporary Furniture Trends Dissecting Income Statement
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