Long Term Mindset on LinkedIn: How To Analyze An Income Statement - FAST Watch for these 10 green flags:… (2024)

How To Analyze An Income Statement - FASTWatch for these 10 green flags:1️⃣ Accelerating Revenue GrowthFormula: Revenue growth rate in year 2 / revenue growth rate in year 1What: Revenue growth rates tend to decline over time. If it suddenly accelerates, that could indicate something special is happening.2️⃣ Gross Margin ExpandsFormula: Gross Profit / RevenueWhat: A rising gross margin indicates that the company has pricing power with consumers or bargaining power with suppliers.3️⃣ Operating Expenses Grow Slower Than RevenueFormula: Operating Expenses Growth Rate vs Revenue Growth RateWhat: Operating expenses tend to grow at a similar rate to sales. If they are growing slower than sales, it suggests the company is becoming more efficient.4️⃣ Operating Margin ExpandsFormula: Operating Income / RevenueWhat: A rising operating margin indicates that the company is becoming more efficient at converting revenue into profit.5️⃣ Interest Income Exceeds Interest ExpenseFormula: Interest Income - Interest ExpenseWhat: When interest income exceeds interest expense, the company has more cash than debt on its balance sheet.6️⃣ Pre-Tax Margin ExpandsFormula: Pre-Tax Income / RevenueWhat: A rising pre-tax margin indicates that the company is becoming more efficient at converting revenue into profit.7️⃣ Income Tax Rate Near 21%Formula: Income Tax / Pre-Tax IncomeWhat: Companies that pay their full share of income tax (21% in the U.S.) tend to do so because they've been so profitable for so long that they are out of ways to shelter their profits from taxes.8️⃣ Net Income Grows Faster Than RevenueFormula: Net Income Growth Rate vs Revenue Growth RateWhat: When net income grows faster than revenue, it means the company is becoming more efficient at converting revenue into profits.9️⃣ Shares Outstanding DeclinesFormula: Shares Outstanding In Year 2 vs Year 1What: When the share count is declining, it means the company is buying back stock.🔟 Earnings Per Share Grows Faster Than RevenueFormula: Earnings Per Share Growth Rate vs Revenue Growth RateWhat: When earnings per share is growing faster than revenue, it means 1) the company is becoming more efficient at converting revenue into profits, or 2) the company is buying back stock to accelerate the EPS growth rate, or 3) both!What Green Flags 🇿🇲 did I miss? Let me know below!P.S. Merry Christmas to all who celebrate.***Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

409

15 Comments

Income Statement SynonymsIncome Statements don't have a universal look or layout.That's because management teams have full control over the terms & layout of their financial statements.Here are the other words that management teams can use when creating their Income Statement:INCOME STATEMENT SYNONYMS:→Revenue Statement→Earnings Statement→Operating Statement→Statement of Earnings→Statement of Operations→Profit and Loss Statement (P&L)REVENUE SYNONYMS:→Sales→Income→Top Line→Receipts→Turnover→Gross Sales→Gross IncomeCOST OF GOODS SOLD SYNONYMS:→Goods Cost→Direct Costs→Cost of Sales→Cost of Revenue→Cost of Products SoldGROSS PROFIT SYNONYMS:→Sales Profit→Gross Margin→Gross Income→Gross EarningsOPERATING EXPENSES SYNONYMS:→Overhead→Operating Costs→Operating Outgo→Sales & Marketing→Business Expenses→Operational Expenses→General & Administrative→Research & Development→Selling, General, and Administrative Expenses (SG&A)OPERATING INCOME SYNONYMS:→Operating Profit→Business Income→Operating Margin→Operating Earnings→Operating Cash Flow→Earnings Before Interest and Taxes (EBIT)PRE-TAX PROFIT SYNONYMS:→Pretax Profit→Pretax Earnings→Income Before Tax→Profit Before Tax (PBT)→Earnings Before Tax (EBT)→Operating Profit Before Tax→Earnings Before Income Taxes (EBIT)INCOME TAX SYNONYMS:→Direct Tax→Revenue Tax→Earnings Tax→Tax on Income→Corporate Income Tax→Fiscal Charge on IncomeEARNINGS SYNONYMS:→Profits→Income→Earnings→Net Profit→Bottom Line→Net Earnings→Profit After Tax (PAT)→Net Income After Taxes→Earnings After Tax (EAT)→Net Income Before Extraordinary ItemsSHARES OUTSTANDING SYNONYMS:→Issued Shares→Outstanding Stock→Outstanding Equity→Basic Shares Outsanding→Diluted Shares Outstanding→Outstanding Shares of Stock→Fully Diluted Shares OutstandingEARNINGS PER SHARE SYNONYMS:→EPS→Profit Per Share→Net Income Per ShareDid I miss anything? Let me know in the comments section below!***➕ Follow Long Term Mindset for more content like this.Want to master the basics of accounting (for free)?Enroll in our email-based course: Financial Statements SchoolGet started here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

101

7 Comments

Great comparative of two of the most important financial indicators.

2

How To Analyze An Income Statement - FASTAnswer these 10 questions:1️⃣ Is Revenue Growing or Shrinking? Why?Formula: Revenue growth rate in year 2 / revenue growth rate in year 1What: Revenue growth rates tend to decline over time. If it suddenly accelerates, that could indicate something special is happening.2️⃣ Is Gross Margin Stable or Contracting? Why?Formula: Gross Profit / RevenueWhat: A rising gross margin indicates that the company has pricing power with consumers or bargaining power with suppliers.3️⃣ Are Operating Expenses Growing Slower Than Revenue? Why?Formula: Operating Expenses Growth Rate vs Revenue Growth RateWhat: Operating expenses tend to grow at a similar rate to sales. If they are growing slower than sales, it suggests the company is becoming more efficient.4️⃣ Is Operating Margin Stable? If Not, Why?Formula: Operating Income / RevenueWhat: A rising operating margin indicates that the company is becoming more efficient at converting revenue into profit.5️⃣ Any Large Non-Operating Income or Expenses?Formula: NoneWhat: Look for any one-time items that will severely impact the rest of the income statement.6️⃣ Is Pre-Tax Income Growing? Why?Formula: Year 2 Pre-Tax Income / Year 1 Pre-Tax IncomeWhat: A rising pre-tax income indicates that the company is growing profitably.7️⃣ Is The Tax Rate Normal?Formula: Income Tax / Pre-Tax IncomeWhat: Companies that pay their full share of income tax (21% in the U.S.) tend to do so because they've been so profitable for so long that they are out of ways to shelter their profits from taxes.8️⃣ Is Net Income Growing Faster Than Revenue?Formula: Net Income Growth Rate vs Revenue Growth RateWhat: When net income grows faster than revenue, it means the company is becoming more efficient at converting revenue into profits.9️⃣ Are Shares Outstanding Stable? Why?Formula: Shares Outstanding In Year 2 vs Year 1What: When the share count is declining, it means the company is buying back stock.🔟 Earnings Per Share Grows Faster Than RevenueFormula: Earnings Per Share Growth Rate vs Revenue Growth RateWhat: When earnings per share is growing faster than revenue, it means 1) the company is becoming more efficient at converting revenue into profits, or 2) the company is buying back stock to accelerate the EPS growth rate, or 3) both!What factors do you look for? Let me know below!Follow Brian Feroldi for more content like this.***📌 P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eNQcpx-xIf you found this post useful, please repost ♻️ to share with your audience.

639

30 Comments

EBITDA Vs FCFWhat's the difference?EBTIDA = EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATIONFORMULA: Net Income + Depreciation & Amortization +/- Non-Operating Income And Expenses + Interest + Income Tax Expense→ EBITDA measures a company's ability to generate profits before considering non-operating expenses such as interest, taxes, depreciation, and amortization.PROS:1: Comparability: EBITDA allows companies with different capital structures to be compared.2: Simplicity: EBITDA provides a quick snapshot of a company’s profit performance. 3: Proxy for Cash Generation: EBITDA is often used as a fast way to measure a company's ability to generate cash from its core operations.CONS:1: Ignores Non-Operating Expenses: EBITDA excludes important expenses such as interest, taxes, depreciation, and amortization.2: Lack of Cash Flow Information: EBITDA does not provide an accurate insight into a company's ability to generate cash.3: Susceptible to Manipulation: EBITDA can be manipulated by adjusting accounting practices, making it less reliable.FCF = FREE CASH FLOWFORMULA: Net Income + Depreciation & Amortization +/- Non-Cash Income And Expenses +/- Changes In Net Working Capital - Capital Expenditures→FCF measures a company’s ability to generate cash from operations using cash accounting after deducting capital expenditures (CAPEX).PROS:1: Focus on Cash: FCF directly measures the cash generated by a company's operations.2: Flexibility: FCF is a better measure of a company’s ability to pay off debt and return capital to shareholders3: Hard To Manipulate: FCF is much harder for a management team to manipulate than EBITDA or Net IncomeCONS:1: Complexity: There are many varieties of FCF, which can make them time-consuming to calculate2: Volatility: FCF can fluctuate widely from year to year due to changes in working capital needs and capital expenditure spending cycles.3: Limited Comparability: Comparing FCF across industries is challenging due to differences in accounting practices and capital structures.Personally, I value Free Cash Flow 10x higher than EBITDA, but I understand why EBITDA is so widely used.Which metric do you use? Let me know in the comments below!***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Get started here (It's free) →https://lnkd.in/eKbRV7g6If you enjoyed this post, please repost ♻️ to share with your audience.

1,597

55 Comments

Great summary of EBITDA calculation.

2

EBITDA Vs FCFWhat's the difference?EBTIDA = EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATIONFORMULA: Net Income + Depreciation & Amortization +/- Non-Operating Income And Expenses + Interest + Income Tax Expense→ EBITDA measures a company's ability to generate profits before considering non-operating expenses such as interest, taxes, depreciation, and amortization.PROS:1: Comparability: EBITDA allows companies with different capital structures to be compared.2: Simplicity: EBITDA provides a quick snapshot of a company’s profit performance.3: Proxy for Cash Generation: EBITDA is often used as a fast way to measure a company's ability to generate cash from its core operations.CONS:1: Ignores Non-Operating Expenses: EBITDA excludes important expenses such as interest, taxes, depreciation, and amortization.2: Lack of Cash Flow Information: EBITDA does not provide an accurate insight into a company's ability to generate cash.3: Susceptible to Manipulation: EBITDA can be manipulated by adjusting accounting practices, making it less reliable.FCF = FREE CASH FLOWFORMULA: Net Income + Depreciation & Amortization +/- Non-Cash Income And Expenses +/- Changes In Net Working Capital - Capital Expenditures→FCF measures a company’s ability to generate cash from operations using cash accounting after deducting capital expenditures (CAPEX).PROS:1: Focus on Cash: FCF directly measures the cash generated by a company's operations.2: Flexibility: FCF is a better measure of a company’s ability to pay off debt and return capital to shareholders3: Hard To Manipulate: FCF is much harder for a management team to manipulate than EBITDA or Net IncomeCONS:1: Complexity: There are many varieties of FCF, which can make them time-consuming to calculate2: Volatility: FCF can fluctuate widely from year to year due to changes in working capital needs and capital expenditure spending cycles.3: Limited Comparability: Comparing FCF across industries is challenging due to differences in accounting practices and capital structures.Personally, I value Free Cash Flow 10x higher than EBITDA, but I understand why EBITDA is so widely used.Which metric do you use? Let me know in the comments below!***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Get started here (It's free) →https://lnkd.in/eKbRV7g6If you enjoyed this post, please repost ♻️ to share with your audience.

391

10 Comments

EBITDA sometimes serves as a better measure for the purposes of comparing the performance of different companies. Free cash flow is unencumbered and may better represent a company's real valuation.Both measures have their place, and each one deserves consideration alongside the other, the comparison below shows pros and cons for each one:

16

EBITDA vs NET INCOME vs FREE CASH FLOWWhat's the difference?EBITDA:Measures the amount of operating profits a company generates from its core operations, excluding the impact of financing decisions, tax regulations, and non-cash expenses.NET INCOME:Measures the amount of net profits a company generates using accrual accounting after deducting all business expenditures.FREE CASH FLOW:Measures the amount of cash a business generates using cash accounting after subtracting all operating expenses and capital expenditures.FOUND ON 🔎EBITDA = Income Statement + Cash Flow StatementNET INCOME = Income StatementFREE CASH FLOW = Cash Flow StatementFORMULA ⚖EBITDA = Net Income + Interest + Taxes + Depreciation + AmortizationNET INCOME = Net IncomeFREE CASH FLOW = Cash From Operating Activives - Capital ExpendituresPROS ✅EBITDA-Shows a company's ability to generate operational profits without the impact of financing, taxes, and non-cash items.- Provides a way to compare the operational profitability of companies with different capital structures.NET INCOME- Incorporates all expenses using accrual accounting- Gives a complete picture of profitability.- Widely used and accepted method of measuring profits.FREE CASH FLOW- Measures how effectively a company is at generating cash.- Indicates the cash available for dividends, debt repayment, and reinvestment.- Provides an alternative way to measure profits.CONS ❌EBITDA- Ignoring interest, taxes, and non-cash charges can paint an overly optimistic picture of a company’s profits, especially for capital-intensive businesses.- Companies with a lot of debt or significant capital expenditures appear more profitable than they really are.NET INCOME- Expenditures such as one-off gains or losses, changes in tax laws, or restructuring costs can distort net income.- Different financing structures and tax jurisdictions can make comparisons between companies and industries difficult.FREE CASH FLOW- Can be significantly impacted by capital expenditure decisions, which may vary widely from year to year.- Requires a deeper understanding of the nuance of accounting.What's your favorite way to measure profits? Let me know below!***➕ Follow Long Term Mindset for more content like this.Want to master the basics of accounting (for free)?Enroll in our email-based course: Financial Statements SchoolGet started here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

109

2 Comments

EBITDA Vs FCFWhat's the difference?EBTIDA = EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATIONFORMULA: Net Income + Depreciation & Amortization +/- Non-Operating Income And Expenses + Interest + Income Tax Expense→ EBITDA measures a company's ability to generate profits before considering non-operating expenses such as interest, taxes, depreciation, and amortization.PROS:1: Comparability: EBITDA allows companies with different capital structures to be compared.2: Simplicity: EBITDA provides a quick snapshot of a company’s profit performance.3: Proxy for Cash Generation: EBITDA is often used as a fast way to measure a company's ability to generate cash from its core operations.CONS:1: Ignores Non-Operating Expenses: EBITDA excludes important expenses such as interest, taxes, depreciation, and amortization.2: Lack of Cash Flow Information: EBITDA does not provide an accurate insight into a company's ability to generate cash.3: Susceptible to Manipulation: EBITDA can be manipulated by adjusting accounting practices, making it less reliable.FCF = FREE CASH FLOWFORMULA: Net Income + Depreciation & Amortization +/- Non-Cash Income And Expenses +/- Changes In Net Working Capital - Capital Expenditures→FCF measures a company’s ability to generate cash from operations using cash accounting after deducting capital expenditures (CAPEX).PROS:1: Focus on Cash: FCF directly measures the cash generated by a company's operations.2: Flexibility: FCF is a better measure of a company’s ability to pay off debt and return capital to shareholders3: Hard To Manipulate: FCF is much harder for a management team to manipulate than EBITDA or Net IncomeCONS:1: Complexity: There are many varieties of FCF, which can make them time-consuming to calculate2: Volatility: FCF can fluctuate widely from year to year due to changes in working capital needs and capital expenditure spending cycles.3: Limited Comparability: Comparing FCF across industries is challenging due to differences in accounting practices and capital structures.Personally, I value Free Cash Flow 10x higher than EBITDA, but I understand why EBITDA is so widely used.Which metric do you use? Let me know in the comments below!***➕ Follow Long Term Mindset for more content like this.Want to master the basics of accounting (for free)?Enroll in our email-based course: Financial Statements SchoolGet started here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

93

2 Comments