basic finance module 2 profit and loss account

Understanding finance- module2Profit and loss account

Dr. E. J Sarma Head HCM – Global

What Does Profit and Loss Statement - P&L Mean?

Saama-Confidential Tuesday, April 11, 2023

A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year.

• These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs.

• The P&L statement is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement".

•Refers to a company's net earnings, net income or earnings per share (EPS).

• Bottom line also refers to any actions that may increase/decrease net earnings or a company's overall profit. A company that is growing its net earnings or reducing its costs is said to be "improving its bottom line".


What Does Bottom Line Mean?

What Does Earnings Mean ?

The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year. Earnings typically refer to after-tax net income.

Ultimately, a business's earnings are the main determinant of its share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run.


What does Earnings Before Interest, Taxes Depreciation and Amortization - EBITDA Mean?

•An indicator of a company's financial performance which is calculated in the following EBITDA calculation:

EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.


•A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow.


what Does Net Operating Profit After Tax

NOPAT

A company's potential cash earnings if its capitalization were unleveraged (that is, if it had no debt). NOPAT is frequently used in economic value added (EVA) calculations.


What Does Return On Invested Capital - ROIC Mean?

• A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments.

• The return on invested capital measure gives a sense of how well a company is using its money to generate returns.

• Comparing a company's return on capital (ROIC) with its cost of capital reveals whether invested capital was used effectively.


The general equation for ROIC is as follows:


net income- dividend----------------------------------Total capital Also known as "return on capital"

What Does Net Income - NI Mean?


A company's total earnings (or profit).

Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses.

This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time.

The measure is also used to calculate earnings per share.

Often referred to as "the bottom line" since net income is listed at the bottom of the income statement. In the U.K., net income is known as "profit attributable to shareholders".

Net income, like other accounting measures, is susceptible to manipulation through such things as aggressive revenue recognition or by hiding expenses. When basing an investment decision on net income numbers, it is important to review the quality of the numbers that were used to arrive at this value.


Net Income

What Does Profitability Ratios Mean?

• A class of financial metrics that are used to assess a business's ability to generate earnings

• as compared to its expenses and other relevant costs incurred during a specific period of time.

• For most of these ratios, having a higher value relative to a competitor's ratio or

• the same ratio from a previous period is indicative that the company is doing well.


4 Levels of Profit


In the income statement, there are four levels of profit or profit margins – gross profit, operating profit, pretax profit and net profit after taxThe term "margin" can apply to the absolute number for a given profit level and/or the number as a percentage of net sales/revenues. Profit margin analysis uses the percentage calculation to provide a comprehensive measure of a company's profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks.

Gross Profit Margin


• Gross Profit Margin = Gross Profit * 100 Turnover Remember:

• Turnover = Sales• Gross Profit = Turnover - Cost of Sales• The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It is a very simple idea and it tells us how much gross profit per $1 of turnover business is earning.

• Gross profit is the profit we earn before we take off any administration costs, selling costs and so on. So we should have a much higher gross profit margin than net profit margin.

• Profitability is a term used by corporations and financial experts when they discuss whether to make or sell a good or service. It is an expectation of making more income from sales of the good or service than they spend performing the services or making the goods. Profitability is different from "profit" in that profitability is an idea or expectation while the "profit" is the physical result.

An example would be during debt consolitation - profitability would be used to describe the steps you would take to get out of debt.


What is Profitability and profit

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conclusion


summary


The definition of P/L

basic finance module 2 profit and loss account

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