Income Statement Formula (Table of Contents)
Income Statement Formula
The income statement is one of the major financial statement for a business which shows its expenses, Revenue, profit and loss over a period of time. Profit or loss is determined once all the expenses of the company are subtracted from Revenue or sales for that period. It is also known as Profit & Loss statement, statement of earnings, and statement of income. There are generally used equation which is derived from the income statement:
Formulas:
- Gross Profit = Revenue – Cost of Goods Sales (COGS)
- Operating profit = Earnings before Interest & Tax (EBIT) = Sales – COGS – Operating expenses
- Net Profit = Revenue – All expenses
Every business has to generate money. For that, they have to sell the product/services they are providing and has to bear expenses, interest payments on loan, taxes, etc. After all the required costs are paid, the amount in hand will be Net income. This is the amount which is available to shareholders. Businesses usually retain that amount and invest back in the business and only pay dividends to the shareholders. Following is the simple income statement format:
| Net Sales |
| -Cost of Sales |
| Gross Income |
| -Selling, General and Administrative Expenses (SG&A) |
| Operating Income |
| +/- Other Income & Expenses |
| Pretax Income |
| – Taxes |
| Net Income (after tax) |
There are few financial ratios which are calculated using income statement and are very helpful for financial analysis. These ratios are called Profitability ratios.
Profit Margin Ratios: These ratios compare various profits of the business (gross profit, operating profit, net profit etc.) with its sales
Formulas for Income Statement:
Gross Profit = Sales – COGS
Operating profit = Earnings before Interest & Tax (EBIT) = Sales – COGS – Operating expenses
Net Profit = Revenue – All Expenses
Examples of Income Statement Formula (With Excel Template)
Let’s take an example to understand the calculation of Income Statement in a better manner.
Income Statement Formula – Example #1
A Company ABC Inc. has following items on its balance sheet. Calculate the Income Statement formula for the same.
Now let’s calculated all the ratios one by one:
Gross Profit Margin is calculated using the formula given below
Gross Profit Margin = (Gross Profit / Sales) * 100
- Gross Profit Margin = ($400 / $1000) * 100
- Gross Profit Margin = 40
Operating Profit Margin is calculated using the formula given below
Operating Profit Margin = (Operating Profit / Sales) * 100
- Operating Profit Margin = ($200 / $1000) *100
- Operating Profit Margin = 20
Net Profit Margin is calculated using the formula given below
Net Profit Margin = (Net Profit / Sales) * 100
- Net Profit Margin = ($140 / $1000) * 100
- Net Profit Margin = 14
Income Statement Formula – Example #2
I have taken Tata Motors as an example. Calculate the Income Statement formula for the same.
Income Statement:
With the help of Income statement, we have the following information for the year 2018:
Now let’s calculated all the ratios one by one:
Gross Profit Margin is calculated using the formula given below
Gross Profit Margin = (Gross Profit / Sales) * 100
- Gross Profit Margin = ($1,259,786,700 / $2,942,425,700) * 100
- Gross Profit Margin = 42.81
Operating Profit Margin is calculated using the formula given below
Operating Profit Margin = (Operating Profit / Sales) * 100
- Operating Profit Margin = ($117,875,100/ $2,942,425,700) * 100
- Operating Profit Margin = 4.01
Net Profit Margin is calculated using the formula given below
Net Profit Margin = (Net Profit / Sales) * 100
- Net Profit Margin = ($90,913,600 / $2,942,425,700) * 100
- Net Profit Margin = 3.09
Things to Remember
- We know those income statement formulas are key parameters in analyzing the performance of any company, but their drawback is that these ratios cannot be compared universally. For example, Net profit margin of Tata motors cannot be compared with Infosys since these two companies operate in different industries.
- Seasonality also affects the analysis while using income statement formula. So before doing any analysis, we should always consider seasonality into consideration.
- We normally say that lower net profit margin is not good for companies but this is not always the case. Companies which are growing, they might have a negative profit margin which implies that they are burning money to gain market which is a good thing. They are sacrificing profits increase their customers base and to increase their presence in the industry
- Although gross profit margins are also important ratio, only analyzing this ratio is not enough. Businesses with great gross margins might not have good operating margin and net income margin because of high operating expenses.
Relevance and Uses of Income Statement Formula
As we have discussed above, if any individual or analyst want to analyze financial statements of any organization, he has to closely look at the income statement of the company and to analyze an income statement, Income statement formulas are an essential tool to do that. Because of their simplicity, it is very easy and convenient to use. Everyone, be it investors, portfolio managers or people like you and me can easily use this tool and can analyze the income statement of any company and can take a decision where to invest their money based on that.
Also, these ratios provide small business the benchmark and they can compare their financials with the benchmark and see where they stand. Business can take a decision and can improve their operations based on the analysis. For example: If a business has higher gross margin as compared to benchmark but lower net profit margin, then they will come to know that operational cost which they are incurring is higher than the benchmark and they need to take essential steps to reduce operational cost.
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