How to analyze an income statement

  • Examine the relationship between items in the income statement and total revenue e.g.
    • COGS/Total revenue: If high, check if materials are too expensive or productivity is too low
  • Compare ratios with a similar company or industry averages to determine your capacity
    • Low gross profit margin = inadequate sales, high materials or inventory cost
    • Low operating profit margin = operating expenses out of control
    • Low net profit margin = high cost of investment or financing activities
  • Trend analysis over time
    • Compare over 3 years

  • Ratio analysis over time
    • Compare over 3 years

To improve profitability:

  • Review pricing to be sure you’ve built in adequate margin for profit
  • Implement marketing and sales activities to attract customers
  • Increase efficiency of production
  • Review inventory to detect inefficiencies
  • Control operating expenses

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