Hey guys, it's sasha and in this video i'll, explain the structure of a profit and loss statement. What the different bits mean, what they all do and which bits are the most important. Some of you might be investing money. Some of you maybe are starting your own businesses, but the profit and loss statement, the p r statement or income statement.

As some people call, it looks pretty much the same, whether you're looking at your local restaurant or a huge multinational company. It is actually not as complicated as it might seem, and hopefully, you'll feel the same by the end of the video i'll do my best to keep things very simple. I have worked for most of my career in banking and financial services and have run a strategy. Consulting company for seven years, so i've done my fair share of looking at p l statements.

So let's jump right in the profit and loss statement is a basic summary of whether a company is making a profit if they're making money. That is what it's all about. It shows the revenue that the company is making uh the money that their customers are paying them, and it also shows the cost that the company is incurring and if the revenue is higher than the cost, then the company is making a profit. However, if the revenue is lower than the cost, then the company is making a loss.

That's the basics! I'm gon na go through a few different p l's here from different companies in the video, so that i can show you the differences in how these numbers are presented. The first bit of every profit and loss statement is the revenue that is the money that the company makes the money that other people are paying them for their products and services. Remember that before you look at anything in the p l, you always have to look at the small prints just above it, because that tells you what the units are. Small companies may not have anything.

There they'll often just report numbers as they are in dollars, pounds euros whatever, but larger companies will use thousands or sometimes millions to make the numbers easier to read. Otherwise the numbers get too long. So here is, for example, a p l from fiver, and you can see that at the top it says in thousands all right, so the top line in this p l is the revenue just like we talked about, and fiverr has made 75.263 million dollars in the Three months to the end of june, public companies will almost always release reports every quarter, so these numbers are almost always covering a three-month period. At the end of every year, the company will also publish their annual results, often in the same report, so it can get a bit confusing.

These will cover the exact same lines and the exact same numbers, but cover a 12 month period. Instead, it will just be the sum of the four quarters for each line, that is it it's not any more complicated than that, sometimes to be helpful. These p l statements also show other periods, so you can go and compare things here. We have the first six months, for example in the year shown on the right as well and the common practice.

The accepted practice with financial statements is to show what these numbers looks like before, so that you can compare them and see how they've changed. Usually, you will see the same quarter from last year as the point of comparison, not the quarter before, but the same quarter last year. Sometimes you do see the quarter before it does vary slightly, but companies often like to compare the same quarter to the same quarter. In the previous year, because then you get a sense of what the annual growth is looking like and because different quarters throughout the year often perform differently.

So in this fiverr report we have q2 2021 and it is being compared to q2 2020 and you can see from the first line that the revenue has grown from 47.1 million dollars to 75.3 million. Remember the units are thousands, so that thing that says 47 130 is actually 47 million dollars all right. The next line in this report is also always the same, and that is the cost of revenue. This is the cost of literally making and delivering the product or service to the customer.

So if you are a company, for example, that makes cars, i don't know, for example, the second line will be the cost of making physically making that car in a factory and then shipping it to wherever it is that the customer just bought it. The whole lot of other costs that exist are further down in the list uh, but the way to think about it is this: the cost of revenue is the cost of actually making and delivering the thing that the customer is paying that revenue for, but it is Only that so in the fiber example, their cost of revenue is 12.5 million dollars. That is pretty low. It is much smaller than the 75 million dollars of revenue, and that is because fiverr is an online platform, so there isn't all that much cost to providing that service, certainly not as much as companies that manufacture things where that cost will be considerably higher as a Proportion of revenue, so, if you take that cost of revenue away from the revenue line, you get a thing called the gross profit and the gross profit just tells you: how much is the company making at the business end of things? If you like, it's before all the other business expenses that we're going to come to in just a second, but it is a really good indicator of how profitable is the company's product a very useful way to analyze.

This number is to take the gross profit and divide it by the total revenue for fiverr, we'll take that 62735 and divided by 75 263 and we get 83.4 percent. This is called the gross margin as a percentage, and sometimes people call the actual number. The gross margin as well - although i think technically, it is not quite correct, but anyway in tech companies or software companies. This will be very high, like it is here, but for most other companies, especially ones that do actual manufacturing.

This will be a lot lower because it costs more money to make physical things i'll show you an example in a second. Sometimes this top bit gets a little bit more complicated. Some companies will split out the revenue and the cost of revenue into separate segments. This usually happens if the company has different kinds of thing that they sell, especially when those things have very different gross margins and that's the reason why they get split out here is, for example, the apple p l for q2.

You can see that at the top we have two separate revenue lines, one for product and one for services, and then you have the two separate cost of revenue lines as well for exactly the same things. There will always be the same number of lines in each bit when they split it out like that. That way, you can work out the gross margin for each individual business line separately and then the same for the total as well. They don't help you because they don't show you those numbers, so you'll have to do a bit of math on a calculator so for apple.

You can see that the product revenue was 63.9 billion dollars because see that small print at the top. It isn't in thousands here. It says that this data is in millions, so product revenue is 63.9 billion dollars and the product cost of revenue is 40.9 billion dollars. So the difference, if you take one from the other, is 23 billion dollars, and that is a 36 gross margin on products, because 23 divided by 63.9 is 36.

But if i then look at the services line and do the exact same calculation, we get 17.5 billion in revenue minus that 5.3 billion in cost equals 12.2 billion in gross profit and 12.2 billion divided by the 17.5 billion dollars of revenue is 69.8. So you can see the difference right away, making iphones macbooks and the rest of it earns apple, a gross margin of 36. So, although it is in dollars a lot more in revenue, the services and software margin is almost double. The interesting thing with apple is that if you look further down uh below the main body of the p l statement, you can see these same numbers broken down by region and by product.

If you really want to know, but that's not a very common way of presenting this data and unsurprisingly iphone revenue - is almost half of the total in here anyway, after we get to the gross profit, we then need to look at the operating costs. This is basically the cost of running the business, everything that isn't the cost of physically making and delivering the product. This section will usually have two or three bits inside it depending on the company and how the likes reported it can sometimes have more or other ones, but usually if it does have the other ones. They are pretty small and not particularly important on material.

The two that always appear in this section are research and development and general admin. Research and development is pretty much what it says in the tin. It is the cost of designing and developing the product. All the people working on new prototypes, developing future products, doing research, maybe coding up new software, whatever all of that sort of thing and general admin is what is the cost of running the business? All of your you know basic operational costs, things like having an office paying staff salaries and all that kind of boring stuff.

Now sometimes that general admin line also includes marketing cost, but for some companies they don't like to bundle them all together and they separate it out and it's a separate line. The way you can tell is if that line also includes the word selling, usually so apple, for example, bundles marketing and all their advertising into the same line, see how it says: selling general and administrative. But if we then switch back to the final statement that we were looking at earlier, they split it out into its own line. And so we have one line which says: general and administ administrative with no selling and a different line for sales and marketing.

And that's it in pretty much every single one of these pll statements. You will just see two or three lines like what we've just discussed and the sum of those is called the operating expenses. That's basically the total cost of running that business, and now we can take the gross profit number that we had before and we subtract that operating cost and the difference is the operating income. So that's the income after subtracting operating costs, so you can see that fiverr has a gross profit of 62.7 million dollars and their operating expenses are 71 million dollars.

So that means they don't have an operating profit. They have an operating loss of 8.3 million dollars, they've lost money and, by the way, finance people don't like using minus signs. So if you see numbers in brackets, like you can here in any financial statement, that just means it is a negative number. It should have just have a minus in front of it, so this 8.3 million here is a minus 8.3 million dollars all right.

So the operating profit is already quite close to the final answer. How much money is the company making and it's basically a measure of whether the company is profitable before you apply a load of accounting and financial mumbo jumbo that doesn't have much to do with the core business performance? This is a sort of pure version of the pnl. This is the way that you can tell the company is actually making money in the case of fiverr. The answer is no, they are losing money because that number was negative, but let's again switch back to the apple p.

L apple's gross profit for the last quarter was 35.3 billion dollars and their operating cost was 11.1 billion dollars. So the difference is 24.1 billion dollars. In operating income, so apple is very profitable. That is quite a lot uh when you compare it to the total revenue at the top of the statement, and then we have this bit below the operating income, which is the financial income or expenses and other stuff.

This is where the accountants do their work and everything that doesn't fit in one of the other categories goes usually. This is not a very big line compared to all the other ones above it. This is where a whole load of random stuff happens and we're not going to get into the debts, because it's actually not particularly useful or interesting. If a company is borrowing money, for example, then the interest payments will be in this bid.

If the company is lending money out or maybe investing in something, then the interest, the income that gets paid to them will also be in this bit. So all of that sort of stuff. After you add or subtract to this bit, you get to something called net income before taxes, net income being net of all the costs of the business. This is the end of the statement.

This is basically, you start with the revenue you subtract, everything that the business has spent their money on, and you get to this bit the net income before taxes. This is the bit that the company then goes and reports to the tax authorities and to the government and to wherever they have to report it, and so naturally enough in order to get from net income before tax to net income. After tax we deduct tax, which is the next bit in that table, companies making a profit will usually do something called a provision for taxes. This is because they don't pay taxes in the same quarter at the same time as they're earning the money they're going to be doing that later, so the money that would be paid for taxes is sort of set aside into this provision bit so that it is Separate from the rest of the company money and so that it is ready to be paid when it's time to do it and if a company is losing money sometimes they will qualify for some tax rebates or some kind of paybacks.

And so, if you look at the example of fiverr, you know they were losing money because they were losing money. They have a small negative amount of tax too, because those numbers are in brackets. So essentially, they are getting money back in that tax line, but only a very small amount. Now after we get to the net income, there's only really one thing left and that is to look at the earnings per share or eps.

It sounds very complicated, but it really isn't. It is super easy and basic. This is just the net income number, the one that we just got to divided by the total number of shares. That's it.

It is really just showing you how much profit each share in the company earned when you take the total profit and divide it by the number of shares that exist. Now there is one complication. There will usually be two different eps numbers. There's the basic earnings per share and diluted earnings per share.

Again, the difference is actually quite simple because those words make it sound like it isn't. Basic just means the obvious total earnings divided by total shares. That's it that's the basic one, but companies will often have some shares that are called convertible shares. They're not technically shares, yet they will become shares at some point in the future.

But at the moment they're called warrants, or maybe they're called options or some kind of convertible debt there's a few different ways of doing it. It's basically a piece of paper that somebody out there has that will eventually become a share. So, for example, companies give employees stock options as part of their salary package, and those employees can at some point in the future, go and exchange that stock option into actual shares and so to keep things simple. You can see what the diluted earnings per share is.

Is just the net income divided by the total number of shares, including all of these weird things that aren't technically shares yet but would become shares in the future? It's just so that you can tell what your share of the pie. What your share of the earnings is when those options do eventually become shares, and that's it. This p l can look pretty complicated when you just first glance at it, but it is really actually quite simple to understand once you understand what it is that you should look for and what all these things mean. If you found this video useful, please don't forget to smash the like button for the youtube algorithm.

Thank you so much for watching. I really appreciate it and, as always i'll see you guys later, you.