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Calculating Gross Profit Margin
Gross Profit Margin can be calculated by dividing gross profit by total revenue. Gross profit margin tells investors the percentage of revenue that is used in the production process.

Table of Contents for Investing Lesson 4
This investing lesson will teach you how to read an income statement and begin your journey onto the road that is financial statement analysis. It is useful for investors and businesses owners because you will learn how the language of accounting is used to build an income statement, helping you understand what is going on with a business.

Putting It Together - Analyzing an Income Statement
At this point, you should have the ability to understand the most common entries on the income statement, calculate and compare gross, operating and profit margins, examine depreciation policies and put competitors in the same industry on a comparbale basis, calculate ROE, asset turnover, and ROA, and much more.

Formulas, Calculations and Ratios for the Income Statement
These financial formulas, calculations and ratios can be used when analyzing an income statement.

Projecting Future Earnings
Projecting future earnings when analyzing the income statement is best done by focusing on the past earnings record.

Return on Assets (ROA)
Return on Assets (ROA) tells an investor how much profit a company generated for each dollar of assets. Return on assets is calculated by dividing revenue by average assets for the period.

Analyzing Brown Safety
One time and extraordinary events on the income statement such as the sale of a business unit, real estate, intangible assets, and marketable securities can increase earnings while the core business is actually losing money.

Abercrombie and Fitch - 2001 Annual Income Statement
Abercrombie and Fitch 2001 annual income statement. Abercrombie and Fitch operated 309 Abercrombie and Fitch stores, 148 abercrombie stores, and 34 Hollister Co stores as of February 2, 2002.

Asset Turnover
The asset turnover ratio calculates the total sales revenue for every dollar of assets a company owns. To calculate asset turnover, take the total revenue and divide it by the average assets of the period.

Return on Equity (ROE)
Return on Equity, ROE, tells investors how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. A high return on equity means a business is more likely to generate cash internally. Return on equity is calculated by dividing net profit by average shareholder equity for the period.

Share Repurchase Programs
Share repurchase programs increase ownership and earnings per share by reducing the number of shares outstanding.

Hiding Share Dilution (Including Underwater Stock Options)
Some companies don't include the possible share dilution from options that are underwater. This occurs when an employee owns options to buy shares at a certain price and due to a sudden drop in stock market value, the option is below the exercise price. Share dilution reduces your ownership percentage in the business.

Basic vs. Diluted Earnings per Share - Basic EPS - Diluted EPS
Basic earnings per share (Basic EPS) is the profit a company made divided by the shares outstanding. Diluted earnings per share (diluted EPS) factor in possible share dilution from stock options, convertible warrants and preferred stock.

Net Profit Margin
Net profit margin is a ratio comparing net profit after taxes to revenue. Investors can calculate the net profit margin by using the income statement.

Net Income Applicable to Common
Net income applicable to common is the bottom line profit the company reported. Analysts divide the net income applicable to common by the total number of shares outstanding to get the basic eps.

Preferred Stock
Preferred stock is a mix between common stock and a bond. Preferred stock holders receive a guaranteed dividend in exchange for limited capital gains.

Accounting Changes
GAAP accounting rules give management a large amount of leeway in determining how to report their earnings to shareholders. Accounting changes can be a signal of financial fraud.

Continuing Operations vs. Discontinued Operations
Discontinued operations are the businesses a company plans on being engaged in for the foreseeable future. Discontinued operations are businesses a company has discarded, sold, or shut down and does not expect to generate revenue or profit in the future.

Unreported or Look Through Earnings
Unreported or look through earnings are the profits that belong to you that are not paid out in the form of a dividend. An investor should put together a portfolio with the highest possible look through earnings to beat the market. When analyzing an income statement, look through and unreported earnings of cost method minority interests should be added back in the income statement.

Minority Interests - The Cost Method, Equity Method, and Consolidated Method
Depending upon the amount of voting stock owned, minority interests on the income statement will be recorded using the cost method, the equity method, or the consolidated method.

Income Before Tax and Income Taxes
Income before tax and income taxes are both reflected on the income statement to show investors the amount of operating profit paid for local, state, and federal taxes. For your reference, here is a list of corporate income tax rates.

Earnings Before Interest, Tax, Depreciation and Amortization - EBITDA
Earnings before interest, tax, depreciation and amortization, also known as EBITDA, is commonly mistaken for a measurement of cash flow. EBITDA came into existence during the 1980s during the leveraged buyout craze that swept Wall Street.

Comparing Depreciation Methods
Depending on which depreciation method is used, the depreciation charges incurred on the income statement can vary greatly. Comparing depreciation methods can make analyzing companies in asset intensive industries much easier.

Double Declining Balance Depreciation Method
The double declining balance depreciation method is an accelerated depreciation method that increases the amount of charges taken during the first few years. The double declining balance depreciation method can be helpful when comparing and analyzing an income statement.

Sum of the Years Digits Depreciation and Other Accelerated Depreciation Methods
The sum of the years digits depreciation method is an accelerated depreciation method that assumes an asset loses a greater percentage of its value in the earlier years of its useful life. Sum of the years depreciation charges are calculated by adding up the useful years of an asset.

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