How To Analyze an Income Statement

hello everyone so my last video talking about balance sheets has the highest like to dislike ratio across my entire channel so thank you so much to everyone who liked that video and now I want to talk about income statements which is another one of the three key financial statements when you're looking at businesses so the purpose of an income statement is to show you the profit or the loss that a business is generating income statements also show you the gross and operating margins of the business which are also very important numbers to know you guys may have heard the terms top and bottom lines and the income statement is also where these two numbers come from so there are quite a few key numbers that we need to look for on the income statement so just like my balance sheet video I want to hop into some real-world examples to show you guys some income statements and some red flags that we can all watch out for so let's just hop right into it okay so for this video we are going to be using Yahoo Finance once again and let's just look at Delta Airlines once again as well so when we search for Delta and Yahoo Finance this is the page that we are brought to so let's just click on financials and go to income statement which should be the first one when you hit financials so when we scroll down we can take a look at the income statement and please keep in mind that all of these numbers are reported in thousands so when we see total revenue right here it may look like 47 million dollars but this is actually 47 million thousand which is 47 billion they just do this to shave off three extra zeros on the income statement another thing that I want to point out is TTM means trailing twelve months so when you have this 2019 at 1231 this number right here represents the year ending December 31st 2019 and in Delta's case right now the trailing twelve months is the same as the year end for 2019 but when Delta reports their next quarterly results the trailing 12 months will be different from the 2019 year so I hope that makes sense but now right off the bat at the top of the income statement we have the total revenue that the business has generated so this total revenue number is the total amount of revenue that the business generated before paying any operational expenses and then the next line down is cost of revenue so the cost of revenue is the total cost of manufacturing and bring a product or service to the customers so you have to think that every business has a bunch of different expenses that are required to actually generate the business revenue and then underneath cost of revenue we have gross profit and what gross profit is is essentially just the amount of money left over after paying all of the costs of the revenue and the gross profit is simply calculated by taking the total amount of revenue minus the cost of that revenue and you're left with your gross profit your gross profit is also what you use to find your gross margin so if we take out the calculator we can do an example so we can take the gross profit of Delta Airlines which is about ten point three billion dollars and we can divide it by the total revenue that the business generated which is just over forty seven billion dollars and when we divide the gross profit by the total revenue we get point two 2 and if we times this number by 100% we get 22 percent so if we round up this number would be twenty two point one percent and this twenty two point one percent is Delta's gross margin but now let's move down to operating expenses so right here we have selling general and administrative expenses so we can go directly to investopedia and see the definition of selling general and administrative expenses so investopedia says selling general and administrative expense or SGA is reported on the income statement as the sum of all direct and indirect selling expenses and all general and administrative expenses GNA of a company s GNA also known as SGA includes all the costs non directly tied to making a product or performing a service that is s GNA includes the costs to sell and deliver products and services and the cost to manage the company so SGA includes things such as marketing and paying all of your employees so we can see here on Delta's income statement that they spent just under two billion dollars on a selling general and administrative expenses now if you guys want to go and find exactly how much they spend on different things you're gonna have to go to Delta's website and look at their actual purported income statement where they break down all of these numbers even further so what Yahoo Finance does is they just take all these expenses and add them up into one nice place so you only go to Delta's reported income statement if you want to find the specifics on what they're spending their money and I also want to let you know that some other companies on Yahoo Finance will have more operating expenses in Delta's case they only have they're selling a general and administrative expenses here on Yahoo Finance and right under SGA we have the total operating expenses and for Delta we can see that their total operating expenses are about 3.7 billion dollars so what we can do here is we can take 3 7-6 4 and minus 1 9 9 3 which is these SGA expenses for Delta and we are left with about 1.7 billion dollars that is not being reported here on Yahoo Finance so if you want to go and find out what this other 1.7 billion dollars of operating expenses is again you're gonna have to go to Delta's income statement but again Yahoo Finance is accurate when they report their total operating expenses so this 3.7 billion dollar number right here you can trust ok and then the next line here is operating income or loss and in Delta's case right here we can see that they have six point six billion dollars in operating income so if this number right here was negative six point six billion dollars then that would be reported as an operating loss but since this number is not negative it means that the business actually generated operating income so how you get your operating income as you take your gross profit and you - all of your total operating expenses so I can just show you guys an example right here if we take ten 3a2 for the gross profit of Delta and we minus the total operating expenses of three seven six four we are left with six point six billion dollars which is exactly the number that we are seeing right here the operating income or loss is also the number that you use to find the operating margin for the business so the same thing that we did here to find the gross margin we can also do to find the operating margin so all we need to do is take six six one eight and divide it by the total amount of revenue that Delta has generated in one year so in this case again it is just over forty seven billion dollars and when we do this calculation we get point four zero so we times this by one hundred percent and we get fourteen point zero percent and this would be the operating margin for Delta and I want to let you guys know that a typical good operating margin is around fifteen percent that is kind of the average operating margin for a business - generate and the higher the operating margin is the better for the business so let's just think about this if Delta is generating 47 billion dollars in revenue as a shareholder you're gonna want Delta to keep as much of this total revenue as profits for the business so if their total operating expenses were insanely high it means that the business is not actually keeping as much of the money that the business is generating as profits so for example if Delta's total operating expenses were like 20 billion dollars then the company would be operating at a loss because the total operating expenses would be greater than the gross profit that the business is actually generating and on the flip side if Delta's total operating expenses were only one billion dollars then the company would be generating a higher operating income which means the company would be generating a higher profit so this is really why you want to pay attention to your operating margins because it tells you how much of the total revenue is actually profits for the business so I hope that all makes sense and we will be getting into some companies that have terrible operating margins and I will be showing you guys what that looks like okay so now let's keep moving down the income statement so right here we have our interest expense and quite literally what this is is the amount of interest that the business has paid so in Delta's case right here we can see that they have paid 301 million dollars in interest in the last 12 months and this interest expense could be the interest on bonds loans lines of credit pretty much anything any interest that the business has had to pay will be reported right here and then the next line down is total other income or expenses net and for this one I also have a definition so this says definition of other income or expenses income and expenses generated or lost from sources not directly related to a business's core operations so essentially what this number is is other expenses or income that the business has generated that are not related directly to the business's core operations so this really could be any number of different things and in Delta's case they generated negative 119 million dollars so in Delta's case this is an expense and not an income since this number is negative and then the next line down is income before tax and the reason that this number is right here is because you take the operating income or loss and you minus the interest expense and then you also add on the other income or expense and then the next line down is the amount of tax that Delta has to pay on the income that they generated so right here we can see that Delta had to pay 1.4 billion dollars in income tax and then the number left over is the actual income from continuing operations so after paying all of their tax Delta generated about four point seven billion dollars in net income so now I want to tell you guys what the top line number is because this is a phrase that is very widely used in the investment world so when you hear someone say the top line number it is quite literally just the total amount of revenue that the business generates and they call it the top line number because when you look at an income statement it is quite literally the top line so since the top line is quite literally the top line on the income statement the bottom line is also quite literally the bottom line which is the net income so when you hear someone say that helps your bottom line or that increases your bottom line it just means that it increases your net income or the amount of money that the business actually generates okay so now that we have gone through the income statement let's take a look at what we actually need to be looking for and what is considered good or bad on the income statement the first thing that you want to be looking for is the operating income or loss so you definitely want the operating income to be a positive number because if the operating income is a negative number it means that the business is generating a loss and not a profit so in Delta's case right here we can see that the operating income is a positive number so the business is actually generating money and the same thing applies for the net income number you want the net income number to be positive and the next thing you're gonna want to do is take a look at the historical numbers here now Yahoo Finance only goes back four years and if you guys can find a program that goes back 10 years I would recommend looking back 10 years the program that I used to find my 10 year financial statements is quest rate which is my broker and on quest trade you can see that they go all the way back to 2010 so if you guys are with quest trade then you have access to this and if you guys are not with quest trade then I would recommend finding somewhere where you can look back at the full 10 years I just want to show you guys Yahoo Finance because it's a free platform that a lot of traders such as myself use so in Delta's case here we can see in 2016 they generated 239 billion dollars in revenue 2017 was 41 billion 2018 was 44 billion and 2019 was 47 billion so the total amount of revenue that Delta is generating is steadily increasing year over year but now let's take a look at their gross profit so we can see that the gross profit in 2016 was ten point six billion and 2017 it was 10.1 billion and 2018 it was eight point nine billion and in 2019 it was ten point three billion so even though Delta generated about eight billion dollars more in 2019 than in 2016 we can see in 2016 Delta generated a higher gross profit than they did in 2019 and this is simply due to Delta's cost of revenue in 2019 so what this tells me is that in 2016 Delta had higher gross margins than they do today and now let's take a look down here at operating income or loss and you want to see if this number is also steadily increasing so in doubt this case we can see that in 2016 they had operating income of six point nine billion so just under seven billion and then it went down to six point 1 billion in 2017 and then even further down to five point two billion in 2018 and now it is back up here to six point six billion but six point six billion is still under that six point nine billion that they generated in 2016 so in Delta's case you can see that their operating income was going down but now it is starting to come back up and then when we take a look at Delta's net income in 2016 they had four point three billion in that income 2017 was 3.5 billion 2018 was three point nine billion and then 2019 was four point seven billion so Delta's net income is actually higher in 2019 than it was in 2016 and if we take a look through the financials we can see that it's most likely due to this income tax expense so Delta only had to pay one point four billion in income tax in 2019 whereas in 2016 they had to pay two point two billion so this tells me that most likely the tax that airlines have to pay lowered from 2016 to 2019 and since their income tax expenses are lower it means that the business is now generating a higher net income so this is one way that you can use an income statement to look around and see what the actual expenses are so now I want to show you guys what a bad income statement does like and I am going to have to take a look at uber z-- income statement to show you so right off the bat we can see that uber z-- total revenue in 2016 was 3.8 billion dollars and in 2019 it was 14 point 1 billion so in terms of revenue uber is generating a lot more revenue in 2019 than they were in 2016 so let's just skip down to gross profit so in 2016 uber had a gross profit of 1.6 billion and in 2019 they had a gross profit of six point nine billion so their gross profits are also increasing very dramatically but when we go down to the operating expenses this is where things start to get a little bit worse so let's just take a look at the operating income or loss so in 2016 we can see that uber was generating a loss of three billion dollars and now all the way over here in 2019 they are losing eight point five billion and this is just due to their operating expenses in 2019 uber had 15 billion dollars in operating expenses versus their operating expenses of 4.6 billion in 2016 so even though Ebers total revenue is going up significantly their operating expenses are also significantly going up and they're actually going up faster than the company is generating new revenue and this is why you're seeing your operating income continually growing and getting bigger and bigger so I know that I might be offending a few people here because I know that Huber is kind of a polarizing company where people either love it or they hate it but I'm not talking about uber as an investment I'm just talking about looking at their income statement and showing you guys just what I see and this is one of the red flags that I want to point out is when the company's revenue is increasing but their operating income is decreasing because it just means that the business is generating more revenue but the actual profits that the business is generating keeps going down and down and down so they're having to pay more and more to actually generate this revenue you know what now that I'm looking at this to ubers total operating expenses are actually more than their total revenue so uber is paying more in operational expenses than the company is actually even bringing in so this is actually quite a big red flag and these are the type of things that you can identify when you do take the time to look through some income statements so now I want to show you guys a fantastic income statement because Delta's was kind of up and down and then an uber x' case the revenue was going up and the operating income was continually going down so now I want to show you guys Google's income statement because this is a phenomenal income statement so right off the bat up here we can see that the top line or the total revenue is increasing dramatically year-over-year in 2016 they reported 90 billion dollars in total revenue and then over here in 2019 and all the way up to one hundred and sixty 1 billion so that is a massive increase and we can also see that the gross profit is increasing as well they did 55 billion in gross profits in 2016 and eighty-nine point nine billion in 2019 so let's go down to operating income or loss and we can see that in 2016 Google was generating 23 billion in operating income and over here in 2019 they are generating just under 36 billion so Google is a business where the total revenue is increasing and their operating income is also increasing with that total revenue so this is what you want to see on a business as operating income you want to see the total revenue and the total operating income increasing together because it means that as the revenue of the business continues growing the profits that the business gets to take in is growing with it and that is what you want to see on the income statement all right and that's pretty much gonna wrap up the video and if you guys haven't seen my previous balance sheet video I would also recommend going and watching that one to gain some more insights into the financial statements of the businesses I also want to let you guys know that I have been getting asked a lot recently to build some sort of course or extra content for you guys to learn how I analyze companies and do everything and I am actually building a course as we speak that will cover everything from the basics of investing all the way up to how to invest in your first business and how to analyze companies confidently so the course is in the works for those of you who are asking for it and I expect to have it done probably before the end of May I'm putting a ton of work into it and I want to make it the best course possible so expect some sort of announcements on my channel before the end of May if you want to grab a copy and with all that being said if you guys enjoyed this video then please remember to just leave a like on it I really appreciate it and it really helps grow my channel and if this is your first time on my channel and you want to see more content like this then please consider subscribing because that would also be pretty awesome and that's going to wrap up the video so thank you so much for watching and I really hope to see you again in the next one

Channel: Daniel Pronk

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Keywords: daniel, investing, stock market, how to, calgary, buy, sell, Daniel Pronk, Learn To Invest, Investing Basics, Beginner, Investing for beginners, Income Statement, Read Income Statement, Analyze Income Statement, How To, Income, Statement, Balance sheet, Cash flow, Read Balance Sheet, Read Cash Flow, Read Balance, Analyze Income, Income Statement tips, Income Statement For beginners, beginner income statement, beginner balance sheet, beginner cash flow, how to read income statement

Id: uVHGgSXtQmE

Length: 17min 50sec (1070 seconds)

Published: Thu Apr 16 2020