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Learn Fundamental Analysis Reading the Income Statement
Intermediate 6 min read

Reading the Income Statement

Revenue, costs, margins, and earnings — how to tell if a company actually makes money.

The Three Statements

Every public company files three financial statements every quarter:

  1. Income Statement — did they make money? (this lesson)
  2. Balance Sheet — what do they own and owe?
  3. Cash Flow Statement — where did the cash actually go?

You'll learn all three. Start here.

The Waterfall

Read the income statement top to bottom. Each line subtracts something from the line above:

  Revenue                   $100
- Cost of Goods Sold (COGS) -$40
─────────────────────────────────
  Gross Profit               $60
- Operating Expenses        -$30   (R&D, marketing, salaries)
─────────────────────────────────
  Operating Income           $30
- Interest & Taxes          -$10
─────────────────────────────────
  Net Income                 $20

In one glance: this company turns every $100 of sales into $20 of profit. That's a 20% net margin — quite strong.

The Three Margins That Matter

Margins compare profit to revenue at each stage. Higher = more efficient.

Margin Formula What It Tells You
Gross Margin Gross Profit / Revenue How profitable each sale is before overhead
Operating Margin Operating Income / Revenue Profitability of the core business
Net Margin Net Income / Revenue What's left for shareholders

Software companies often have 70%+ gross margins. Grocery stores might have 25%. Compare a company to its industry, not to other industries.

Growth Quality

Two companies can both grow revenue 20% — but one might be buying that growth at a loss while the other is earning it. Always check:

  • Is operating income growing faster than revenue? (Operating leverage — great)
  • Is revenue growing but margins shrinking? (Yellow flag)
  • Are they cutting R&D to make earnings look good? (Red flag)

EPS and Why It Matters

Net Income ÷ Shares Outstanding = EPS.

If a company earns $1 billion but issues so many new shares that EPS shrinks, individual shareholders lost ground. Watch for share dilution — it's a hidden cost of growth.

A great income statement tells a story: "We sold more, kept more of what we sold, and turned that into real profit per share — without giving away the company through dilution."

Key Terms

Revenue (Top Line) — Total money a company brought in from sales before any costs are subtracted.
Gross Profit — Revenue minus the direct cost of producing what was sold (COGS).
Operating Income — Gross profit minus operating expenses like salaries, marketing, and R&D.
Net Income (Bottom Line) — What's left after every cost, interest, and tax — the company's actual profit.
EPS (Earnings Per Share) — Net income divided by total shares outstanding. The per-share profit.
Not financial advice. This lesson is educational content designed for use within Fantasy Stock League. It is not an investment recommendation or a solicitation to buy or sell any security. Always do your own research and consult a licensed financial professional before making real investment decisions.

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The Balance Sheet — What a Company Owns and Owes