A profit and loss statement (P&L) (also called the income statement) shows how much money a company earned in a period, what it spent, and what profit was left. Read from the top line (revenue) down to the bottom line (net profit), it is a waterfall: money flows in at the top and each expense line drains some away.
What does the waterfall look like?
Priya opens the annual P&L of Kaveri Motors, a fictional vehicle maker. Simplified to round figures:
| Line | ₹ crore |
|---|---|
| Revenue from operations | 1,000 |
| Cost of materials | −600 |
| Employee costs and other expenses | −200 |
| EBITDA (operating profit) | 200 |
| Depreciation | −50 |
| Interest (finance costs) | −30 |
| Profit before tax | 120 |
| Tax | −20 |
| Net profit | 100 |
Let's walk down it line by line.
Revenue from operations (₹1,000 crore). Money earned from actually selling vehicles. Watch for a separate "other income" line, interest on cash, one-off gains. A company whose profit depends on other income rather than its real business deserves a closer look.
Cost of materials (₹600 crore). Steel, tyres, batteries. The direct cost of making what was sold. Revenue minus this is the gross profit: ₹400 crore.
Employee costs and other expenses (₹200 crore). Salaries, marketing, electricity, rent. What remains is EBITDA (earnings before interest, tax, depreciation and amortisation) ₹200 crore. It measures how profitable the day-to-day operations are, before financing and accounting charges. The article what are revenue, EBITDA and profit margins turns these levels into percentage margins you can compare across companies.
Depreciation (₹50 crore). Factories and machines wear out. Accounting spreads their cost over the years they're used, so this line is a real cost but not a cash payment this year. A distinction that matters when you read what is a cash flow statement, and why does it matter.
Interest (₹30 crore). The cost of Kaveri Motors' borrowings. A heavily indebted company can have healthy EBITDA and still see profit vanish here.
Tax (₹20 crore), then net profit (₹100 crore). The bottom line, profit belonging to shareholders. Divide it by the number of shares (Kaveri Motors has 10 crore shares) and you get earnings per share of ₹10, the input to the P/E ratio explained in what are EPS, P/E ratio and book value.
What should I compare the numbers against?
A single year's P&L is a photograph; the story is in the film. Priya checks three things:
- Growth: is revenue rising year on year, and is profit rising along with it? Revenue up 20% but profit flat means costs are eating the growth.
- One-offs: did a factory sale, an insurance claim or a tax refund inflate this year's profit? Companies must disclose exceptional items, subtract them mentally.
- Trend of each line: if raw-material costs grow faster than revenue for several years, margins are being squeezed.
Things to keep in mind
- Revenue is opinion-resistant; profit is more mouldable. Accounting choices (depreciation method, provisioning) can shift the bottom line, so read the notes, not just the totals.
- Net profit is not cash. A company can book a sale, show profit, and still be waiting for the customer's payment.
- Always compare the same period (this year vs last year, or this quarter vs the same quarter last year) because many businesses are seasonal.
- One good or bad year proves little. Look at three to five years before forming a view, and never treat a single P&L as a buy or sell signal.
Read next
What are revenue, EBITDA and profit margins? — The lines on that statement, and what the gaps between them tell you.