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How can we do profit and loss statement analysis for the picking of?

First of all profit & loss statement is not the only thing you should look at and pick up stocks after that. I will tell you the factors you should look at when you reading income statement which is also called profit and loss statement. Revenue mix- You should look at if the total sales of company is increasing at healthy growth rate and company is not relying on other income revenues. Other income is not a core business income of company. Compare the sales growth of company with its peers in the industry to know if company is outperforming the industry or atleast maintaining the industry growth rate. EBIDTA- This can be considered as operating income of the company. EBITDA is important to analyse that how operationally profitable is company. As an investor we like to know that company is running its operations profitably. Moreover the different methods and assumptions of depreciation may give us inflated net profit figures, so we focus more on EBITDA. Profit margins- Look at margins closely like gross profit margin, operating profit margin, net profit margin and again compare with its industry peers. Declining or less margins may make us dig further to know if company is paying more for raw materials than its competitors or is it because of increase in advertising expenses. Higher raw material cost is a red flag, but advertising expenses can be seen as company is being aggressive in increasing its revenues which may show in future. Tax rate- It is important to know that how much taxes is company paying and on an average basis it should always be in line with industry standards because taxes affect the net profit margins. Expenses and sales- Always check for rise in expenses. Its always obvious that as long as company is increasing its revenues, the expenses will also rise, but the thing to notice is that expenses shouldnt be growing at higher rate than the sales figure. For example sales grew by 8% and expenses grew by 10%. This will not make sense because it shows that company is very inefficient in cost controlling. If rise in expenses is higher than sales, then check all the headings in expenses column and figure out what expenses are growing the most. Try to find the answers in annual report for the same that if management is able to give a rational explanation behind it. So, these are the things in generally look in an income statement. Also note that you cant look at all income statements the same way like how you get COGS in income statement of a manufacturing company, but same COGS will not be there in income statement of an IT company. There you will have to look at employee expenses. It may take too much of time to go into detailed study of companys financial statements, but I guess its better to invest in 3 solid researched companies in a year than half assed research on 1520 companies. Its your hard earned money and you should be more than careful about it.

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