Income Statement

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.

Example Of An Income Statement : Apple Inc 10K Or Annual Report

Within the income statement, you can find revenue, cost of goods or cost of sales, the operating expenses, the operating income, the net income and also the earnings per share.  Hence, the income statement has a lot to offer investors.

You may believe that the income statement only offers a general view of the company’s finances. But it can do so much more. If you were to study the income statement for several years, you may come to a conclusion that raw material prices, which is part of the cost of goods sold section is falling. With the same level of revenues, that leads to a higher net income, a higher earnings per share and eventually a higher stock price. These are things that can only be found after studying the income statement over several years. How is an options trader to take advantage of that? Well, he could use a specific strategy, bullish or not, to profit from movements in the underlying.

Read: Revenues