An income statement, also called a profit and loss statement or P&L, explains how a company moved from sales to profit during a quarter or year. This lesson deliberately keeps things simple. Its purpose is to help you recognise the main lines before you move into accounting detail.
We will use a fictional company, Lumen Coffee, throughout this Academy series so the income statement, balance sheet and cash flow statement connect.
From revenue to net income
Imagine Lumen reports the following figures, in millions of euros:
| Income-statement line | Amount | Plain-language meaning |
|---|---|---|
| Revenue | €100m | Money earned from selling coffee and subscriptions |
| Cost of sales | −€40m | Direct cost of producing what it sold |
| Gross profit | €60m | Revenue left after direct production costs |
| Operating expenses | −€35m | Staff, stores, marketing, technology and administration |
| Operating income | €25m | Profit generated by the core operation |
| Interest expense | −€3m | Cost of financial debt |
| Income tax expense | −€5.5m | Corporate tax recognised for the period |
| Net income | €16.5m | The bottom line attributable after expenses |
The order matters. Each line answers a different question.
Revenue, gross profit and gross margin
Revenue is the starting point: price multiplied by the products or services sold, with accounting adjustments. Revenue growth is useful, but it does not tell you whether those sales are profitable.
Gross profit = revenue − cost of sales. Lumen keeps €60m after direct production costs. Its gross margin is therefore 60%:
Gross margin = gross profit ÷ revenue
Gross margin helps you follow pricing and direct costs. It cannot tell you whether the whole company is profitable because salaries, marketing and administration still sit below it.
Operating income and operating margin
After operating expenses, Lumen has €25m of operating income. You may also see this called operating profit or EBIT—earnings before interest and taxes.
Its operating margin is 25%:
Operating margin = operating income ÷ revenue
This is a useful view of the economics of the core business. Compare it over several years and against genuinely similar companies. A “good” margin depends heavily on the industry.
Interest, taxes and net income
Interest belongs below operating income because it comes from financing decisions rather than selling coffee. The income tax expense here is corporate tax in the company accounts; it is not the personal tax an investor may pay.
After interest and tax, Lumen reports net income of €16.5m. Net income matters, but one-off gains, restructuring costs or accounting estimates can move it. Always ask why it changed.
Earnings per share and the P/E ratio
If Lumen has 10 million shares, its earnings per share (EPS) is €1.65:
EPS = net income attributable to ordinary shareholders ÷ weighted-average shares
EPS can grow because profit grows or because the company reduces its share count. Dilution can do the opposite.
If a share trades at €24.75, its P/E ratio is 15:
P/E = share price ÷ EPS
P/E describes how much the market price represents relative to current earnings. It does not tell you by itself whether a share is cheap, safe or attractive. Continue with what the P/E ratio means and when it misleads.
A five-question first reading
- Is revenue growing, and where does that growth come from?
- Are gross and operating margins stable, rising or falling?
- Does operating income grow with revenue?
- Are interest, taxes or one-off items changing the bottom line?
- Is EPS growth supported by profit rather than only share-count changes?
This first reading gives you questions, not a verdict. For the complete workflow, use the fundamental-analysis guide.
Common questions
What does an income statement tell an investor?
It shows the revenue, expenses and profit generated over a period. It helps explain how sales become operating income and, after interest and taxes, net income.
Is operating income the same as net income?
No. Operating income reflects the core operation before interest and taxes. Net income is what remains after those items and other non-operating effects.
This is an introductory educational explanation, not accounting, tax or investment advice. Real statements contain additional lines and notes that should be read in context.