Income Statement Explained: From Revenue to Net Profit

0:00 Welcome back to The Money Mice, the podcast for South African retail investors who want to stop feeding like they're drowning in jargon and start navigating the market like someone that actually knows what they're doing. I'm your host, Jay. And for today's episode, I sat racking my brain thinking, what exactly do I record this time? Because I've gone through all of the jargon that I'm aware of. Then it struck me when I started my retail investing journey some seven years ago, I had a problem with financial statements.

0:28 And that's what we're kicking off was today, the brand new four part series on decoding company financial reports. So these reports are the big review moments, the time when CEOs can't hide behind their fancy suits, vague promises or future strategy. Rd. maps. It's essentially the company's report card and we're going to unpack it step by step without all the boring lecture tones that you would get in your MBA or counting degrees.

0:56 So Part 1 is all about the income statement. Some call it the profit or loss statement or if you want to be really fancy, the you know, I call it the company's version of how it started versus how it going meme. It answers the simple question that the company actually make money or are they just here for the vibes? So let's start with the first one, revenue. That's all the money a company earns from selling its goods or services. You've Shopright rings up your groceries. Well, that's revenue for Shopright. If Vodacom sells you airtime at 11:00 PM because you forgot to buy bundles, well, that's revenue from mining company exports iron or to China because while South Africa doesn't want to process it anymore, that is revenue for the mining company. It sounds obvious, but years where people get tripped up. A company can shout we made 50 billion in revenue this year and you think, sure, that's a proper big business, but if it costs them 55 billion to do it, that big revenue is as useful as a tender awarded to your cousin's company that can't even spell infrastructure.

2:02 So don't just stare at the size of the number, look at whether it's growing and whether it's real cells, not oneself. Tricks like selling off assets. Next we've got cost of sales or cost of goods sold. This is the actual cost of producing or buying the stuff that was sold. Let's take Woolworths when they sell you 120 round pack of free range chicken breasts. They first had to buy the chicken packaging, that black tray that makes you feel like you're Gordon Ramsay and then truck it to the store.

2:35 That's the cost of sales for a mining house, its wages, diesel blasting costs and odd consulting fee that looks suspiciously like a donation to someone's political campaign. When you subtract cost of sales from revenue, you lived with what's known as gross profit, and that's the meat on the Bri. So basically growth profit is the meat on your bra grid. Before the freeloader show up, it tells you whether the company can actually make money from its core product.

3:03 An example being Mr. Price. They are masters at protecting gross profit. They keep costs low, sell simple fashion and don't try to be something. They not do that to a retailer who's trying to sell champagne taste to Castle Lager budgets that gross profit shrinks quicker than a cold pool dip in winter. Always check gross profit margins.

3:26 A fat gross profit means a company's pricing smartly. The skinny one means trouble might be brewing. Now let's see about running the circus or operating expenses. This is where companies either shine with discipline or expose themselves as reckless spenders. These are the costs of running the show, salaries, rent, it, marketing, travel and yacht. Sometimes those questionable business development trips where the CEO just happens to end up at a five star resort in Dubai.

3:57 This is also where you spot where the management runs the company like a tight family budget or like a corrupt municipality ordering the luxury cars while the pothole swallows the taxis. If operating expenses are ballooning while revenues flat, you know someone's not in control of what's happening. Subtract those expenses and you land on operating profit, or EBID. Now EBID is the real business score.

4:23 It stands for earnings before interest and tax. But here's the simple definition. This is the money the company made from doing what it's supposed to do before the tax man and the bankers arrive for their slice. If you're comparing two companies in the same industry, Ebud is your scoreboard who's actually running their business well without leaning on creative accounting or one of asset sales.

4:47 Think of it this way, embodies like your monthly salary before SAWS takes their cut. It shows your real earning power, not the story you tell your mates about how rich you are before David orders run through. Now let's get to the professional guide crashes. Every party has guide crashes in the income statement, its interest and tax. Interest is what the company pays if it's borrowed money. And here's the thing.

5:12 Some Companies Act like that. Okay, keep swiping the credit card for everything. Eventually the interest bill eats up all the profits. Then comes tax. No company escapes it, though some are very creative in how they minimise it. If you want to laugh, read a set of results from a company bragging about its efficient tax structure. That's usually code for moving money around so cleverly that SARS needs a magnifying glass to find that. And then let's get to what's left on your plate or net profit.

5:42 This is the after everyone's eaten what's left on your plate number. If it's positive, the company made a profit. If it's negative, they'll dress it up with phrases like strategic investment here or positioning for growth. That's boardroom speak for we screwed up, but please clap for us anyway. Net profit is what really matters for you, the retail investor. It's the number that determines dividends, it's the number that influences the share price, and it's the number that separates actual businesses from expensive hobbies. So as a retail investor, revenue tells you if sales are moving in the right direction.

6:19 Gross profit shows if they're making money off of what they sell. Operating profit reveals how efficiently they run things. Net profit tells you if you the shareholder actually benefit or if management is just benefiting from a whole bunch of bonuses. So let's get to your stockpile starter pack of stock lingo for those financial statements Edition version one. Revenue, money coming in, cost of sales, money out to make the stuff.

6:46 Gross profit, meat on O'Brien operating expenses running this whole circus. Operating profit or ebid the real scorecard interest and tax. The professional guide crashers net profit will what's left for you. Next time we'll tackle the balance sheet. That's the what we own versus what the old Showdown pilot. Some companies own less than a high school tuck shop and own more than a dodgy tender to Premier at a Commission of inquiry. So while my jokes may be flat and not actual tag jokes, just remember this is not financial advice. Please do your own research and speak to a licensed advisor. Free audio post production by our phonic.com.