Brian Feroldi Profile picture
Aug 28, 2022 20 tweets 7 min read Read on X
If you pick stocks, you MUST learn how to read an income statement.

Here’s everything you need to know:
The income statement shows a company’s revenue and expenses over a period of time, usually a quarter or year.

It’s also called:
▪️Profit and Loss statement, or “P & L”
▪️Statement of earnings

It follows this basic format:
Most public companies show their income statement in their quarterly earnings press release, but not always

Find them by looking at:
▪️10-Q (quarterly report)
▪️10-K (annual report)
▪️Aggregator websites like @theTIKR
Let's use Home Depot fiscal 2021 as an example

Step 1: Get the data
▪️ Go to sec.gov
▪️ Search "HD"
▪️ Click the "10-K" from March 23rd
▪️ Scroll to "Statement of earnings"
The income statement flows in a step-down manner.

The top number is revenue (sales), and costs + expenses are subtracted as you go down
Let's take them one at a time

1: Revenue

This is the net amount received from the sales of products/services to customers

Sales are NET, meaning it includes discounts, returns, and any other deductions.
2: Cost of Goods Sold (COGS)

This figure shows all of the costs related to producing the product and/or service

It's also called "cost of sales"
3: Gross profit

Also called “gross income”

This assesses a company's efficiency at using its labor and supplies in producing goods or services

This is a VERY important number
4: Operating Expenses (OPEX)

A catchall category that includes all expenses to run a company’s day-to-day operations

Some companies break them out by category. Others lump them all together.
5: Operating Income

Gross Profit - OPEX

This shows how much profit a company earned from its ongoing operations

It can also be called “EBIT”
6: Non-Operating Income/Expense

Revenue or expenses incurred unrelated to running the business

The biggest number is usually interest on debt or gain/loss on the sale of an asset
7: Pre-tax income

Operating Income
+/-
Non-Operating Income/Expenses

Also called “EBT” or “Earnings Before Tax”
8: Income Tax Expense

Taxes paid to federal, state, and local governments
9: Net income

We made it to “the bottom line”, aka “earnings” or “profits”

If this number is positive, the business is "profitable"

If it's negative, the business is "unprofitable"
10a: Time to divide the profits!

There are 2 ways to report "earnings per share"

1) Divide by "basic shares," which is the total number of shares of common stock currently outstanding
10a:

2) Divide by "diluted" shares, which is the total number of shares that could be outstanding including stock-based compensation + convertible debt
A helpful exercise is to divide each figure by sales, giving us "margins"

Doing so allows you to compare companies of different sizes to each other and track profit direction

My favorites:
▪️Gross Margin
▪️Operating Margin
▪️Net Margin
If you invest, it's CRITICAL to learn accounting

Want help? @Brian_Stoffel_ and I created a course that teaches accounting in plain English

Registration is currently open

Interested? DM me for a special coupon code

maven.com/brian-feroldi/…
Prefer to learn by reading books?

These three are excellent:
Want to learn more about the nuances of accounting?

This other thread I wrote can help:

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More from @BrianFeroldi

May 8
I bought my first stock 21 years ago.

Here are 21 harsh investing truths I learned the hard way:

1: The worst mistake is to sell a mega-winner early Image
2: Humans are pre-programmed to be bad at investing.

3: Your personal finances are 10x more important than your investments.

4: Handle volatility is 100x easier in theory than in reality.
5: Confidence in your strategy will rise and fall in lock-step with asset prices.

6: The best stocks put their owners through gut-wrenching volatility. The worst stocks do, too.

7: You're going to be wrong—a lot. Be humble.
Read 10 tweets
May 6
How to Read 10Ks Like a Hedge Fund

Here’s what metrics professional analysts focus on (using $MA as an example:) Image
1: Business overview.

Understand everything about how the business works, like:
- What is the business model?
- Who are the key suppliers, distributors, partners?
- Revenue quality?(Recurring? Recession proof?)
- What is the revenue split from products / services? Image
2: Risk Factors

Most of these are standard.

Identify the risks that are company-specific and make sure you understand them. Image
Read 14 tweets
May 5
"I actually spend more time looking at balance sheets than income statements."

- Warren Buffett, 2025 Shareholder Meeting

Here's exactly how to analyze a Balance Sheet in less than 2 minutes: Image
The balance sheet is one of the three major financial statements.

It shows a company’s:
▪️Assets: What it owns
▪️Liabilities: What it owes
▪️Shareholders Equity: It's net worth

At a fixed point in time Balance Sheet
That “at a point in time” part is key!

A balance sheet is a SNAPSHOT of a company’s net worth.

It is measured at the end of a quarter/year. Image
Read 11 tweets
May 4
The most confusing term in accounting:

Stock-Based Compensation

How does it work? Why is it controversial?

Here’s a complete overview (in plain English): Image
How can shareholders incentivize executives & employees to think & act like owners?

Stock-based compensation (SBC) has become the standard answer.

SBC pays executives and employees with stock instead of cash.
In theory, SBC aligns employee + owner incentives.

Employees make more money when the stock goes up and less (or nothing) when the stock goes down.

This makes employees care about the direction of the stock.
Read 17 tweets
May 3
Charlie Munger HATED it.

John Malone LOVES it.

Most people have NO CLUE what it means.

What is EBITDA? Why is it important?

Here's everything you need to know about this controversial accounting term: Munger vs Malone
EBITDA is an accounting term that is an alternative way to measure a company's profitability.

EBITDA is simply an acronym: Image
To calculate EBITDA, you start with Net Income (Earnings).

Then you add back Interest, Taxes, Depreciation, and Amortization. Image
Read 21 tweets
May 2
7 ridiculously simple money rules (that actually build wealth):

Rule #1 - The Tracking Rule Image
Rule #2 - The Employer Match Rule Image
Rule #3 - The Automation Rule Image
Read 9 tweets

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