# How to Read an Income Statement

> An income statement (profit-and-loss) shows revenue at the top, subtracts costs step by step, and ends with net income at the bottom. The margins along the way reveal how efficiently a company turns sales into profit.

## From top line to bottom line

| Line | What it is |
|------|-----------|
| Revenue (top line) | Total sales |
| − COGS | Direct cost of goods sold |
| = Gross profit | What's left to cover everything else |
| − Operating expenses | R&D, S&M, admin |
| = Operating income | Profit from core operations |
| − Interest & taxes | Financing costs and taxes |
| = Net income | Final profit to shareholders |

## The three margins

- **Gross margin** (gross profit ÷ revenue) — pricing power and production efficiency.
- **Operating margin** (operating income ÷ revenue) — cost control; cleanest read on core profitability.
- **Net margin** (net income ÷ revenue) — bottom-line profit per dollar of sales.

Rising margins signal a strengthening position; compare to sector peers.

## Growth and one-offs

Watch revenue growth and whether net income grows faster than revenue (operating leverage). Beware one-off items that distort a single quarter.

## Net income to EPS

Net income ÷ shares = EPS (/learn/eps), the input to the P/E ratio (/learn/pe-ratio).

## Bigger picture

Read alongside the balance sheet and cash flow statement — the profitability, health, and cash pillars of fundamental analysis.

## FAQ

**What is the difference between gross and net margin?** Gross margin is profit after only the direct cost of goods sold, showing pricing power. Net margin is profit after all costs — operating expenses, interest, and taxes — showing bottom-line profitability.

**Is revenue or net income more important?** Both matter. Revenue shows demand and scale; net income shows whether that revenue actually becomes profit. A company can grow revenue while losing money, so read them together with margins.

**What is operating income?** Operating income is profit from a company's core business operations, before interest and taxes. It's often the cleanest measure of how profitable the underlying business is.

## Related reading

- How to Read a Balance Sheet (/blog/how-to-read-a-balance-sheet)
- Earnings Per Share (EPS) (/learn/eps)
- P/E Ratio Explained (/learn/pe-ratio)

Analyze any stock free: https://foliofundamentals.com/analyzer