Understanding P&L Statements: Your Guide to Profit and Loss

Ever wondered how investors and business owners really know if their company is making money? The answer lies in the Profit and Loss Statement (P&L), one of the three critical financial documents every trader should understand.

What’s a P&L Statement?

Simply put: Revenue - Expenses = Profit (or Loss)

A P&L statement tracks your income, costs, and bottom line over a specific period (monthly, quarterly, or yearly). It answers the fundamental question: “Did we make money?”

Breaking Down the P&L

Gross Profit = Revenue minus cost of goods sold. Tells you your markup power.

Operating Profit (EBIT) = Gross profit minus operating expenses. Shows if your core business works.

Net Income = Revenue minus everything. The real money left after all deductions (taxes, interest, etc.).

Why Should You Care?

1. Spots efficiency problems - If expenses are climbing but revenue isn’t, something’s broken.
2. Reveals profit drivers - See which revenue streams actually matter.
3. Enables comparisons - Compare this quarter to last quarter, or this company to competitors.
4. Guides strategy - Data-driven decisions beat guessing.

Two Common Formats

Report Form: Clean, vertical layout. Easy to read, good for presentations.

Account Form: T-shaped layout with expenses left, revenue right. More formal, preferred by accountants.

How to Read a P&L (4 Steps)

1. Check the time period - Monthly? Yearly? This matters.
2. Profit or loss? - Revenue > Expenses = profit. Revenue < Expenses = loss.
3. Where’s the money coming from? - Interest? Product sales? Fees?
4. Where’s it going? - Salaries? Marketing? Operations?

Pro Tip

Don’t rely on P&L alone. Check the balance sheet, cash flow statement, and industry context too. A company can show profits but have zero cash—that’s a red flag.

P&L is the storyteller; learn to read between the lines.