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 17
8 visuals every investor should memorize:

1: In the long run, stocks win: Image
2: You make far more money by holding through bull markets that you lose by holding through bear markets. Image
3: Investors are their own worst enemy.

Why do they underperform?

Their behavior. Image
Read 9 tweets
May 16
My worst investing decisions ever all contain the same word:

Sell

But that doesn't mean I "buy and forget"

Here are the exact reasons I will exit an investment: Image
1: Thesis Busted

Translation: I was wrong

This could be because:
▪️Brand deteriorated
▪️Management isn't executing
▪️I misjudged the moat
▪️Rising competition

If the original reasons I bought are no longer valid, I admit defeat and move on
2: Accounting Irregularities

If I can't trust the numbers, I'm out.

Accounting Irregularities = You are dead to me forever
Read 14 tweets
May 12
How to analyze an income statement, FAST.

Study these 7 infographics:

1: Income Statement Overview Image
2: Three Types of Analysis Image
3: Net Income vs Free Cash Flow Image
Read 8 tweets
May 11
The most powerful investing principles I've ever learned are counterintuitive.

That’s logical - if they were intuitive, I wouldn't need to learn them.

Here are 7 counterintuitive investing principles I had to learn the hard with (with visuals) Image
1: Don’t haggle

If a stock is trading at $21, I used to set a limit order for $20.50

But my orders usually didn't fill.

Haggling caused me not to BUY a few mega-winners.

Which is FAR MORE costly than slightly overpaying. Image
Think of it this way:

If stock checks all your boxes and goes from $20 to $200

Does it matter if you got in at $19.56 or $21.25?

If you think a stock has 10x potential from today's price, don’t haggle over pennies.

Just buy it.
Read 18 tweets
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

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