The income statement

The income statement reads top to bottom, and every step down narrows what the number is about.

The shape

Line	What it is
Revenue from operations	What customers paid for the thing the company sells
Other income	Everything else — interest, rent, gains on sale
Cost of materials / purchases	What the goods cost
Employee benefit expense	People
Other expenses	Power, freight, marketing, rent, professional fees
Operating profit (EBITDA)	What the business earned before financing, tax and depreciation
Depreciation and amortisation	Assets consumed this year
Finance costs	Interest on borrowings
Profit before tax
Tax expense	Current and deferred
Net profit	What belongs to shareholders

Two lines in bold, and most of the information is in the first of them.

Revenue, and the question under it

The top line is what customers paid for what the company sells.

Two things to check before trusting any growth figure.

Is it from operations? Revenue from operations and other income are separate lines for a reason. A company whose "revenue" grew because it sold a building has not grown.

Where does it come from? The segment note breaks revenue by business and often by geography. A single company can be three businesses with different economics, and a group total conceals which one is working. This is the note chapter 2 sent you to, and it is routinely more surprising than the headline.

Why operating profit is the number

Operating profit — revenue from operations less operating costs — is what the business earned from doing its actual job, before decisions about financing and before tax.

It is the most comparable figure in the statement, because it strips out three things that differ between companies for reasons unrelated to the operation:

Financing. Two identical businesses, one borrowed and one not, have very different interest costs and very different net profits. Their operating profits are comparable.

Tax. Rates and incentives differ, and tax can swing on items unrelated to the year's trading.

Depreciation policy. Within rules, companies make estimates about asset lives. EBITDA sits above that judgement.

So when chapter 8 looks at margins, operating margin is the one that says most about the business, and net margin is the one that says most about the whole situation.

The honest caveat about EBITDA

EBITDA excludes depreciation, and depreciation represents assets genuinely being consumed. For a company with heavy plant, machinery wearing out is a real cost of trading, and a figure that ignores it flatters.

The discipline: use EBITDA to compare operations, and never treat it as cash the shareholders could have. Chapter 18 returns to this when EBITDA becomes a valuation input.

Other income, which deserves suspicion

"Other income" is interest on cash, rent, dividends from investments, and gains on selling things.

Two reasons to look at it every time.

It is often not repeatable. A gain on selling land is a one-off. A company whose profit rose because of it has not improved.

It can be a large share of profit. A business with a modest operating profit and a large cash pile can earn much of its net profit from interest. That is real money and it is not the business, and it is why chapter 1 insisted on knowing how the company makes money.

The check is one subtraction: operating profit against net profit. If net profit is growing faster, the growth is coming from below the operating line, and that is a different claim about the company.

Finance costs and tax

Finance costs are the price of the balance sheet choices of chapter 12. Rising finance costs with flat debt means the company is refinancing at worse rates, which is information about how lenders see it.

Tax expense combines current tax and deferred tax. An effective rate — tax over profit before tax — far from the statutory rate is worth a look at the note: it may be legitimate incentives, or an item that will not repeat.

Exceptional items

Items the company has chosen to present separately because it considers them unusual — a restructuring charge, an impairment, a litigation settlement.

Two habits.

Read what they actually were. The note describes them.

Count how often "exceptional" appears. A company with exceptional items every year for five years does not have exceptional items. It has costs it would prefer you excluded, and the honest figure includes them.

The point

Revenue from operations is the business; other income is not. Operating profit is the most comparable line because it sits above financing, tax and depreciation policy. If net profit is growing faster than operating profit, the growth is coming from somewhere other than the operation — and exceptional items that recur are not exceptional.