Income statement and profitability ratios
An income statement is a financial document which reports an organization’s revenues, expenses and profits over a given period of time. Here’s an example of an Income Statement:
Revenue……………………………… $100,000
Cost of Goods Sold……………… 25,000
Gross Profit……………………….. 75,000
Rent Expense…………………….. 10,000
Salaries…………………………….. 15,000
Advertising Expense…………….. 4,500 Total Operating Expenses.. 29,500 Operating Income………………. 45,500 Interest Expense…………………. 5,200 Net Income…………………………. 40.300
To analyze the profitability of this company based on the above income statement we can compare the net profit to total revenue (i.e., Net Profit/Total Revenue) – in this case it comes out to be 40%, meaning that for every dollar in revenue earned by the company $0.40 goes into profits after accounting for all expenses and taxes. Other measures, such as Gross Profit/Total Revenue = 75% or Operating Margin (45% Operating Income/ Total Revenues), can also be considered. These ratios can serve as benchmarks and allow us to assess past performance and compare future progress to them. This allows us to make informed decisions regarding how to allocate our resources moving forward to ensure our long-term profitability and success.