Why does reading P&L matter to every investor

Whether you are a beginner investor or experienced, understanding the Profit and Loss Statement or PNL( is one of the key skills that help you make smart investment decisions. The P&L is not just numbers on paper but a story about how much value a business has created.

Why is the profit and loss statement important to everyone

In fact, the main point is that the profit and loss statement tells the story of a business’s success )or failure(. Managers use it to measure whether they made a profit or loss this year. Investors use it to decide whether to allocate funds to this business or not. Entrepreneurs use it to adjust strategies for better growth.

Additionally, data from PNL also helps us forecast future performance. By observing revenue and expense trends, we can assess the direction in which the business is heading.

What is P&L and how does it differ from other documents

Profit and Loss Statement )งบกำไรขาดทุน( is a financial document that provides an overview of:

• The money the business earns from selling goods or services
• The expenses incurred in operations
• The remaining amount )profit( or )loss( after deducting all expenses

The basic equation of P&L is straightforward: Total Revenue − Total Expenses = Profit or Loss

But the importance lies not in the equation itself but in breaking down revenue and expenses into various categories, which helps us see where the money is coming from and where it is going.

Structure of P&L: How to read it

When you open a company’s profit and loss statement, you’ll see various sections alternating:

First section: Revenue includes:

• Revenue from sales of goods or services )Sale( – the main income the business earns
• Other income )Other Revenue( – such as interest, dividends, or rent

Second section: Cost of Goods Sold which subtracts from revenue to find Gross Profit )Gross Profit(:

• Cost of goods sold )Cost of Goods Sold( – raw materials, labor, production-related costs

Third section: Operating Expenses subtracted from gross profit:

• Selling expenses )Selling Expenses( – advertising, marketing
• Administrative expenses )Administrative Expenses( – salaries, rent for office space

After this step, we get Operating Profit )EBIT(

Fourth section: subtract financial expenses to arrive at Profit Before Tax )EBT(

Fifth section: deduct taxes to get Net Income )Net Income(

What do the numbers in the P&L tell us

Gross Profit )Gross Profit( indicates: “How much more than the cost of goods sold does the business price its products?” If this number is high, it shows good pricing power. If low, it may need to reduce costs or increase prices.

Operating Profit )Operating Profit( shows: “After deducting general expenses, does the business still generate real profit?” This figure helps assess management effectiveness.

Net Income )Net Income( indicates: “After all deductions, how much money does the business have left?” This is the final figure most investors are interested in.

How to become proficient in reading P&L

Step 1: Check the period Look at the P&L for which period )month, quarter, year( to compare accurately.

Step 2: Get an overview Profit or loss? Is this figure up or down compared to last year?

Step 3: Study revenue sources Where does the income come from? Is it balanced or skewed?

Step 4: Analyze expenses Which expenses are the highest? Are they increasing or decreasing? Can they be reduced?

Differences in P&L presentation formats

Some companies use Report Form )Report Form( – arranged from top to bottom, easy to read.

Others use Account Form )Account Form( – split into two sides )right-left(, the traditional accounting style.

Both methods display the same data, just arranged differently.

Notes on using P&L for investment

First: Never look at a P&L alone. Always compare multiple years to see trends.

Second: View the P&L together with other documents, such as the Balance Sheet )Balance Sheet(, for a comprehensive understanding.

Third: Remember that P&L is just financial figures. You should also consider other factors like management quality, product quality, market position, etc.

Summary

The P&L is a powerful tool for investors. If you know how to read it, you will see the story the numbers tell. This makes investment decisions more grounded. Whether investing in stocks, businesses, or even crypto, keep in mind that P&L is just one piece of the puzzle. Good decision-making requires multi-dimensional data and analysis.