Why can't investors do without the P&L Statement? The most crucial secret in financial reports

If you want to gain a deeper understanding of a company’s true operational status, the Profit and Loss Statement (P&L statement, or งบกำไรขาดทุน) may be the key financial indicator you need to focus on. This report visually displays the company’s revenue, expenses, and final profit or loss over a specific period, serving as an important reference for investors, entrepreneurs, and financial analysts to make decisions.

What is a P&L Statement? Core Concept Explanation

Profit and Loss Statement (P&L) or งบกำไรขาดทุน is a financial report reflecting a company’s operational results within a certain accounting period. It systematically records income from various channels, all expenses incurred, and ultimately calculates whether the company is profitable or in loss.

For operators, the value of the P&L statement lies in:

• Clearly presenting income streams and their sources
• Detailing each expense to identify cost optimization points
• Calculating net profit to assess operational efficiency
• Providing data support for future strategic adjustments

Compared to other financial statements, the P&L statement more directly reflects the complete picture of “where the money comes from, where it goes, and how much remains.”

Basic Calculation Formula of P&L: Clear Financial Logic

Understanding the core formula of the P&L statement is the first step in mastering financial analysis:

Total Revenue – Total Expenses = Profit (or Loss)

The three elements of this formula represent:

• Total Revenue — All funds obtained through sales of goods or services, plus other operational income
• Total Expenses — All costs incurred to maintain operations, including raw materials, labor, rent, marketing, etc.
• Profit or Loss — Profit when revenue exceeds expenses; loss otherwise

Deep Breakdown of P&L: From Revenue to Net Profit

The simple “Revenue – Expenses = Profit” is overly simplified. The actual P&L needs to record profit data at multiple levels, each reflecting different operational dimensions:

This series of indicators acts like a layered perspective, allowing you to see the company’s profitability at different stages.

Two Standard Formats of P&L Reports

1. Report Form

This format presents financial information narratively, with a clear and easy-to-read structure:

Example: Company XYZ 2024 P&L Statement

Income Section

• Sales Revenue: 20 million
• Other Income: 0.5 million
• Total Income: 20.5 million

Expenses Section

• Cost of Goods Sold: 8 million
• Selling Expenses: 2 million
• Administrative Expenses: 3 million
• Financial Expenses: 0.5 million
• Income Tax: 1.925 million
• Total Expenses: 15.425 million

Net Profit: 5.075 million

Advantages of Report Form:

• Logical flow, easy to understand
• Emphasizes overall operational overview
• Suitable for reporting to non-financial audiences

2. Account Form

This format uses a T-shaped layout, with expenses on the left and income on the right:

Advantages of Account Form:

• Standardized format, widely recognized by accounting standards
• Facilitates reconciliation and verification
• Easy to connect with other financial statements

The Three Key Profit Indicators in P&L, What Do They Each Explain?

Gross Profit

Calculation = Sales Revenue – Cost of Goods Sold

Information Revealed = The company’s pricing ability and cost control level. A higher gross margin (Gross Profit ÷ Sales Revenue) indicates stronger competitive advantage.

Example = If sales revenue is 1 million, COGS is 400,000, gross profit is 600,000, and gross margin is 60%. This shows that for each dollar sold, only 0.40 dollar goes to costs, indicating favorable pricing strategy.

Operating Profit (EBIT)

Calculation = Gross Profit – Selling Expenses – Administrative Expenses

Information Revealed = Whether the core business is profitable. This metric best reflects operational efficiency and market competitiveness, unaffected by financing methods and tax policies.

Example = A company with gross profit of 600,000, selling expenses of 150,000, administrative expenses of 200,000, results in an operating profit of 250,000. Consistently positive operating profit indicates a healthy core business; a decline warrants attention.

Net Income

Calculation = Profit Before Tax – Income Tax

Information Revealed = The final profit the company retains. This is the most straightforward figure in the report, representing the true economic benefit to shareholders.

Example = Profit before tax of 300,000, with a 25% tax rate, results in 75,000 tax, and net income of 225,000. This is the actual usable profit.

How to Quickly Read a P&L Statement? 4 Practical Tips

Step 1: Confirm the reporting period

P&L statements can be prepared for various periods: monthly, quarterly, or annually. Data from different periods for the same company can vary greatly, so first confirm which period you are reviewing.

Example Comparison:

• Company A Q1 net profit: 5 million
• Company B annual net profit: 20 million

These figures are not directly comparable due to different time frames.

Step 2: Quickly judge profit or loss

Look at the net profit figure to assess the company’s basic status:

• Net profit > 0 = Profitable
• Net profit < 0 = Loss-making
• Net profit = 0 = Break-even

This is the most straightforward judgment method.

Step 3: Track income sources

A company’s income may come from multiple channels, with different stability and growth potential:

• Core business income (most stable)
• Investment income (more volatile)
• One-time other income (unsustainable)

Example: If 80% of a company’s profit comes from one-time asset sales rather than daily operations, such profit is less reliable.

Step 4: Analyze expense structure

The expense ratio reflects the company’s business model:

• High-tech companies: high R&D expenses
• Retail companies: high sales expenses
• Financial firms: high labor costs

Comparing expense structures with industry peers can help evaluate management efficiency.

Practical Applications of the P&L Statement

Scenario 1: Investment Decision

Investors evaluate profitability and forecast future earnings through the P&L statement. Special attention is paid to the growth trend of net profit and profit margins.

Scenario 2: Business Management

Management uses the P&L to identify cost pressure points and develop cost reduction strategies. For example, if administrative expenses are too high, streamlining management levels may be considered.

Scenario 3: Loan Approval

Banks or investors assess a company’s debt repayment ability via the P&L. Profitable companies are more likely to secure loans.

Scenario 4: Valuation Analysis

Acquirers use profit data from the P&L to estimate company value, often based on “Price-to-Earnings ratio × Net Income.”

Common Mistakes in P&L Analysis

Mistake 1: Focusing only on net profit, ignoring profit quality

Some companies show good net profit but mainly from investment gains or asset sales, while core operations are loss-making. Such profits are not sustainable.

Mistake 2: Ignoring accounting policy impacts

Different accounting policies (e.g., depreciation methods, inventory valuation) affect the figures. The same company’s P&L in different countries may vary significantly.

Mistake 3: Static view without longitudinal comparison

Looking at a single period’s P&L is of little value; it is essential to compare multiple periods to observe trends.

Mistake 4: Ignoring cash flow

Profit and cash flow are two different concepts. A company may show profit on paper but have negative cash flow (common in high-growth companies).

Summary

The Profit and Loss Statement (P&L) or งบกำไรขาดทุน is a key window into understanding a company’s financial health. Mastering its basic structure (Total Revenue – Total Expenses = Profit), understanding multi-level profit indicators (Gross Profit, Operating Profit, Net Profit), and learning to quickly read the report will equip you with basic financial analysis skills.

However, it is important to remember that the P&L statement is just one aspect of financial analysis. Complete investment decisions also require considering the balance sheet (assets and liabilities), cash flow statement (actual cash inflows and outflows), industry analysis, management team evaluation, and more. Especially in crypto asset investments, relying solely on a single financial indicator for decision-making carries high risk; a multi-angle comprehensive assessment is necessary.