Income Statements

"Things are bad around here but you're making big money. What's the bottom line?"
--Marv (Wall Street)

To be a successful investor, you must be comfortable with examining a company's financial statements. Publicly traded companies release three primary financial statements: income statement, cash flow statement, balance sheet. These statements express what a business has done, and offer some insight into what it can do in the future.

You don't need to be an accounting genius to make sense of financial statements. Here is a summary of the things I tend to look for in income statements (we'll cover cash flow statements and balance sheets in future missives). Let's use the income statement of Intel Corp (INTC) for reference. You can find all of Intel's financial statements on the Schwab site as well.

Although much attention is often paid to income statements, I tend to view them with less scrutiny. Investors often focus on 'net income' near the bottom of the income statement. This is the infamous 'bottom line' measure of profits. For its most recent fiscal year (ended 12/29/18), INTC reported net income of about $21 billion.

Here's the thing about net income. Because it is influenced by many accounting 'tricks,' net income is often more construct than reality. It frequently does not reflect the true cash profitability of a company.

Rather than focusing on the 'bottom line,' I usually pay more attention to the 'top line,' or total revenue. Revenue captures the dollar value of all goods and services sold by the company. Revenues are much harder to 'fudge' from an accounting standpoint; they provide a good measure of total stuff sold in the marketplace.

From Intel's income statement, we can see that the company realized total revenue of $70.8 billion in its most recent fiscal year. Note also that revenues have been rising steadily over the past four years. Sales growth is almost always a good thing.

Sometimes I also check out profit margins. There's gross profit margin and net profit margin. Using INTC:

gross profit margin = gross profit/total revenue = $43.7 billion/$70.8 billion = 61.7%

net profit margin = net income/total revenue = $21.0 billion/$70.8 billion = 29.7%

Anything over 50% gross and 10% net is good (and rare), which makes Intel's profit margins uncommonly good.

Next time we'll examine the cash flow statement.

position in INTC