Ajitansh Kar, Gurugram, 20 March 2023
One of the most important financial statements to analyze while studying about a company is its income statement. An income statement helps us understand the profits earned and losses incurred over a particular period by a firm/company. You can easily access the income statement for any listed company via its annual report. I personally like to use websites like tickertape and screener.in to access the same, as the data represented is cleaner and easier to understand and interpret. Let us dive in and analyze the income statement of a company called Aptus Value Housing Finance India Ltd. for FY’22 as an example. The company is involved in financing activities for housing needs of the middle class and people living in rural areas.
The first thing which you will notice on the income statement is a column named Revenue. Revenue tells us about the sales a company has made over a period of time (Quarterly or Yearly). It is also referred to as top line by many analysts. In our example, we can see that Aptus has made sales of over 815 Crore in the financial year ending in March 2022. A growth in revenue is also a must to look for as it gives us an idea whether the business has grown, stayed stagnant, or shrunk over the past few years. In the case of Aptus, revenues have grown over 58% annually over the past five years. Companies which have a revenue growth rate of 10-15% annually are considered good while those growing at an annual rate of >20% are considered superior than others.
The next column which you will see is Expenditure, which tell us about the different costs incurred by the business. Expenditure can be of many types such as employee cost, manufacturing cost, etc. Aptus has only 0.19 % of its revenue as manufacturing costs, as it is involved in the business of lending which means there is no product to be made. Its major expenses are its employees which accounted for 10.5% of its total expenses.
When we deduct the Cost of Goods Sold (COGS) from the total revenue, we get the operating profit. This is the profit generated by any company before accounting for other costs such as interest, depreciation, tax, etc. Dividing the operating profit by total revenue and multiplying by 100 gives us operating profit margin (OPM%). In the case of Aptus, OPM stood at 670 Crore and OPM% stood at a staggering 82% for FY’22. It is assumed that any business which can generate more than 40% OPM margin each year; is a business worth researching about and investing.
Other significant costs such as interest, depreciation, amortization, and taxes are deducted from the operating profit to derive the net profit of a company. The net profit for Aptus stood at 370 Crore for FY’22. Now if we divide this number by total revenue and multiply by 100, we get the net profit margin (NPM%). For Aptus, the NPM% stood at 45.4% for the whole fiscal year 2021-22. Companies which have an NPM% of 10-15% annually are considered average, those with 20-35% are considered great while those with >40% are considered as excellent.
I hope that you now have a better knowledge about reading and understanding an income statement and would use it to improve your investing journey.