The income statement will show how a company’s net profits are derived. The income statement is filed quarterly, half-yearly and annually. When studying the income statement, the gross margins of the company can be calculated from it. Increasing gross margins overtime can be a good thing. This could be due to lower costs and increased revenues.
Studying the income statements over several years can paint a picture of the company’s financial health. For example, if revenues and net profits have increased over time, one can deduce that the company is doing well in general.
A company that has a poor record of generating earnings may not be a candidate worthy of short selling while a company that has a good record of generating earnings may not be a candidate for going long on. For this reason, traders or investors should combine the analysis of the income statement with the analysis of the cash flow and the balance sheet.