It is very essential to analyse when we invest invest our money in stocks. Today, it would be basic, because I want to start with easy stuff for starters like me. Financial statement roughly comprises of income statement, balance sheet, and cash flow. I'm going to deal with income statement throughout several chapters.
Income statement shows how much money a company earned within a designated time period. A company generally report their quarter, half, and annual income statement to stockholders. Having this report, we must know profit rate, return on equity (ROE), the tendency of the profit, and whether the profit lasts or not. Refer a photo below.
1. Sales: Quarter or annual sales of a company will be written here (should be shown at the top of the financial statements). We now know that this company achieved 2,000 million dollars of sales by looking at the table above. So we rapidly have to look into sales cost and gross profit.
2. Sales cost: The cost of raw materials + labor cost of products from a company will be shown here.
3. Gross profit: We can get this amount of money when we subtract sales cost from sales.
We can get gross profit rate from gross profit and sales (gross profit rate = gross profit/sales X 100). Then this company's gross profit rate is 80%. We can recognize this company as a promising company that has a long-term competitive advantage.
The gross profit rate of Coca-Cola, which is one of Warren Buffett's favorite companies, was over 60%, and it's generally defined that companies with a long-term competitive advantage have 40% of gross profit rate or more. Also, we estimate the future of the company by covering up the gross profit rate for the last 10 years.
Today, we covered what is sales, so what I want to know next is about business expenses, which have to be subtracted from gross profit.
Referred book - Warren Buffett and the Interpretation of Financial Statements (by Mary Buffett and David Clark)
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