P&L: The profit and loss statement that investors need to understand accurately

When it comes to business management or investment decisions, the financial statement called the P&L (Profit and Loss Statement) or “Income Statement” in Thai becomes an extremely important document because it directly indicates whether your business or the company you’re interested in investing in is making a profit or incurring a loss.

What is P&L and Why Is It Important to Investors

The P&L or Profit and Loss Statement summarizes the company’s revenue, expenses, and profit (or loss) over a specified period. Typically, the P&L shows data monthly, quarterly, or annually, allowing management and investors to see a clear overview of the company’s operational performance.

The importance of the P&L not only helps in understanding performance but also serves as a key tool for strategic planning, analyzing operational weaknesses, and planning future growth. Additionally, it enables comparison with competitors and tracking changes in business models.

Basic Structure of the P&L: From Revenue to Net Profit

Understanding how to calculate the P&L is straightforward. The main formula used is:

Total Revenue - Total Expenses = Profit (or Loss)

Breaking it down into components, the P&L has a layered structure as follows:

• Sales and Service Revenue: The main income from selling products or services to customers.
• Cost of Goods Sold (COGS): Costs related to producing goods or providing services.
• Gross Profit: Revenue minus COGS.
• Operating Expenses: Additional expenses necessary for running the business, such as selling, administrative costs, and other income.
• Earnings Before Interest and Taxes (EBIT): Operating profit derived solely from core operations.
• Earnings Before Tax (EBT): EBIT minus financial expenses like interest.
• Net Income: The final result, profit after deducting all expenses, including taxes.

Profit Levels: What Each Stage Tells You

As mentioned, the P&L calculates profit at multiple levels, each revealing different insights:

Gross Profit indicates the efficiency in managing production costs. A high gross profit suggests the company can price its products above costs and manage its supply chain effectively.

Operating Profit (or EBIT) reflects how well the company manages general expenses. A high operating profit indicates efficient operational management.

Net Income is the final figure showing how much profit remains after all expenses. This number is most important to investors as it represents the true performance.

Presentation Formats of the P&L: Report vs. Account

The P&L can be presented in two formats, each with different purposes and advantages:

1. Report Form

Presented as a vertical, linear statement from top to bottom, starting with revenue, then expenses, ending with net profit.

Advantages:

• Easy to read and understand, suitable for beginners.
• Shows a continuous, clear story.
• Facilitates detailed analysis.

2. Account Form

Presented as a two-column statement, with expenses on the left and revenues on the right. The balance between the two sides provides clarity.

Advantages:

• Clear and comprehensive, emphasizing balance.
• Accepted by government agencies and stock exchanges.
• Suitable for audits and detailed review.

Why P&L Matters to Investors and Managers

Assessing Financial Performance: The P&L provides an overview of operations and helps analyze how each part of the business contributes to profit.

Analytical Data: Investors can use the P&L to evaluate financial health, calculate financial ratios, and estimate investment value.

Profitability Indicator: It shows whether the business can generate profit from operations and helps forecast future performance.

Strategic Planning: Data from the P&L assists managers in developing strategies to reduce costs, increase revenue, or improve operational efficiency.

How to Read a P&L Like a Pro

Step 1: Check the Reporting Period

First, understand the period covered by the P&L—monthly, quarterly, or yearly. Comparing P&Ls from different periods with large differences may not be meaningful.

Step 2: Get an Overview of Profit or Loss

Determine whether the P&L shows a profit or loss. If revenue exceeds expenses, it’s a profit; if expenses exceed revenue, it’s a loss. For example, in 2023, the Bank of Thailand reported a net profit of 191,077,634,015 THB, indicating efficient operations.

Step 3: Analyze Revenue Sources

Identify where the revenue comes from, such as interest income, fees, or gains from exchange rates. Knowing revenue sources deepens understanding of the business.

Step 4: Examine Expense Structure

Review where the company spends money, identify the largest expense items. This helps assess operational efficiency and potential areas for cost improvement.

Step 5: Compare Over Time

If multiple periods’ P&Ls are available, compare trends in revenue, expenses, and profit. Upward trends suggest growth; downward trends may indicate issues needing attention.

Example of P&L Analysis

Consider the Bank of Thailand’s 2022 P&L, which reports revenue from five main sources: interest income, gains from securities sales, fees, gains from exchange rates, and other income. Expenses include interest paid, staff costs, other expenses, and losses from securities sales.

Analysis shows the bank relies mainly on interest income and fees, managing expenses well, resulting in high net profit.

Summary: P&L as the Heartbeat of Business Analysis

The P&L or Profit and Loss Statement is a vital component of financial analysis. Whether you’re an investor, manager, or entrepreneur, understanding the P&L helps you make better business decisions.

However, analyzing the P&L alone isn’t sufficient for meaningful investment decisions. Other factors such as national monetary policy, business growth potential, management quality, and market competition should also be considered. Additionally, comparing the P&L with the balance sheet and other financial statements provides a more complete picture.