Practice Income Statement Analysis With a Real Statement
The best way to learn how to read and analyze and income statement is to pick up an annual report or Form 10-K of a real company and practice reading the financial statements. It s good to simply get your hands on a couple, see how they are similar or different, examine some of the unique lines you might see on one company s income statement but not that of another firm. You will notice how certain businesses, in certain sectors or industries, have completely different economic characteristics, resulting in completely different profitability pictures that tend to result in some sectors and industries producing much better outcomes over decades for shareholders.
You will begin to be able to see the business through these income statements, especially in conjunction with the other financial statements and the footnotes. You start to understand the things driving profitability and how rigid the cost structure is.
To match up with what I did in my lesson on balance sheet analysis, in this income statement analysis lesson I m retaining the original sample income statement I first published more than fifteen years ago. It comes from Microsoft s 2001 annual report and it shows the full fiscal year income statement figures for 2001, 2000, and 1999. Although the world has changed significantly since then, the big concepts and principles you are about to learn haven t been modified much. I hope, also, that seeing the timelessness of fundamental analysis will make you realize the power of a good long-term investment. Truly great businesses have a certain stability in their core economic engine that makes them enjoy certain advantages.
A firm like Microsoft, one of the best businesses of all time, is inherently less secure than a firm like Hershey as the activities that produce the numbers in Microsoft s income statement are changing all the time, subject to technological advancement and competition that attack on all fronts. As Microsoft founder Bill Gates once said, the firm s next biggest competitor could be a kid in a garage.