What is P&L? Understand the Profit and Loss Statement to grasp the company's true profitability

Why Are Investors Paying Attention to P&L?

Whether they are professional investors or entrepreneurs, they regularly review the company’s P&L (Profit and Loss Statement) for analysis. This financial statement not only shows a company’s earning ability over a specific period but more importantly, it reveals where the money has been spent—directly influencing buy or sell decisions.

The reason P&L is important is because it helps management and investors quickly assess: Is this business profitable or losing money? If profitable, where does the profit come from? If expenses are high, is there room for optimization? The answers to these questions are all hidden in the P&L.

A Single Sheet to See Through: The Core Logic of P&L

What is the essence of P&L?

Simply put: Total Revenue - Total Expenses = Profit (or Loss)

This is the only formula for P&L. But don’t underestimate it—by breaking down this formula, you can see the entire operational status of the company:

Total Revenue = All cash flows and accounts receivable obtained from selling products or services

Total Expenses = All money spent to maintain operations, including raw materials, employee wages, office rent, marketing, etc.

Profit or Loss = Profit when revenue exceeds expenses; loss otherwise

Layer-by-Layer Analysis of P&L: From Gross Profit to Net Profit

Most companies’ P&L does not just show a final number but displays multiple profit indicators in layers. These indicators progress sequentially, each reflecting different dimensions of operational efficiency:

Gross Profit = Revenue - Cost of Goods Sold

This figure tells you: even after deducting all production costs, how much value does your product or service contribute? It’s the most direct indicator of product strength.

Operating Profit (or EBIT) = Gross Profit - Operating Expenses

After removing sales, administrative, marketing, and other daily expenses, how efficient is the company’s core operations? This number reflects the profitability of the core business.

Earnings Before Tax (EBT) = Operating Profit - Financial Expenses

This is the profit after considering interest and other financing costs. Especially important for companies with debt.

Net Income = EBT - Income Tax

This is the final profit the company can actually keep. It’s the most straightforward figure and the easiest for investors to use when assessing company value.

Two Common Formats of P&L, Which One to Choose?

1. Report Form P&L

Structured simply into three main parts: Revenue, Expenses, Net Profit. Numbers are listed sequentially from top to bottom, culminating in the final result.

Advantages: Clear logic, quick to understand at a glance; suitable for reporting to non-financial audiences.

Disadvantages: Lacks detailed intermediate steps, potentially hiding important nuances.

2. Account Form P&L

Lists revenues and expenses side by side in a T-shape. This format is more common in formal financial statements.

Advantages: Well-structured, layered, each part is clear; easy to benchmark against industry standards.

Disadvantages: Looks a bit complex; requires some financial knowledge to interpret quickly.

In practice, both formats are usable; the key is choosing the one that best fits your scenario.

How to Use P&L for Investment Decisions?

Step 1: Confirm the reporting period

P&L data is a snapshot of a specific time frame. It could be monthly, quarterly, or yearly. The monthly P&L and annual P&L of the same company can differ greatly, so always verify which period you are viewing.

For example, a startup might lose 500,000 in its first month but make a profit over the full year. Confusing periods can lead to completely opposite judgments.

Step 2: Quickly judge profitability or loss

The most direct method: check whether the net profit at the bottom is positive or negative.

If positive, the company was profitable during this period; if negative, it was losing money. But don’t draw conclusions based on this number alone—losses might be due to short-term investments or strategic adjustments.

Step 3: Track the diversity of revenue sources

Where does the company’s income come from? The more diversified the sources, the lower the risk.

For example, if 80% of revenue comes from a single product, the risk is high—if that product encounters issues, the whole company is affected. Conversely, if income is evenly distributed across three to five products, risk is more manageable.

Step 4: Analyze expense structure and identify optimization opportunities

P&L details each expense item. You should check for obvious anomalies:

• Is employee cost too high relative to revenue?
• Are marketing expenses within reasonable limits?
• Can miscellaneous expenses be cut?

Benchmark against industry peers’ P&L to help identify issues more quickly.

The True Role of P&L: Why Do Entrepreneurs Check It Monthly?

For a company, P&L is more than just a financial report—it’s a command baton:

Measure operational efficiency — Changes in profit margins on the P&L can quickly indicate whether the business is improving or deteriorating.

Identify cost black holes — If expenses spike unexpectedly in a month, P&L will clearly show the cause.

Support strategic adjustments — Based on P&L data, companies can decide whether to increase investment in certain departments or cut costs in others.

Prepare for financing and loans — The first report banks and investors look at is the P&L.

Common Mistakes Beginners Make

1. Focusing only on net profit, ignoring intermediate steps — A net profit of 1 million looks good, but if it was achieved by selling fixed assets, it’s a one-time gain, not a reflection of ongoing operational ability.

2. Confusing P&L with cash flow — P&L shows profit, not necessarily cash. A company can be profitable on paper but short on cash (e.g., too many receivables).

3. Ignoring inflation effects — The same numbers in different years may have completely different purchasing power. Consider this when comparing historical data.

4. Relying too heavily on a single period’s P&L — A good quarter doesn’t mean the company is stable long-term. Look at at least 3-5 years of data to identify trends.

Summary: P&L Is the Key to Understanding a Business

Whether you are an investor, entrepreneur, or financial analyst, learning to read P&L is essential. It answers the most direct question: Is this company making money?

But remember, P&L is only part of the financial picture. Complete investment decisions also require analyzing the Balance Sheet, Cash Flow Statement, and other reports, along with industry outlook, team capabilities, competitive landscape, and more, to make more confident judgments.

A good investment opportunity isn’t just about attractive numbers on the P&L but understanding how those numbers are generated and whether they can be sustained. That’s the mindset of a professional investor.