Income Statement Glossary
The income statement (also called the profit and loss statement, or P&L) summarizes a company’s revenues, costs, and expenses over a specific period — typically a quarter or a fiscal year. It tells you whether the business is making money and, more importantly, how it makes money. For value investors, the income statement reveals the quality of earnings, the durability of margins, and the true operating economics of a business.
Revenue & Cost of Revenue
Revenue
Total sales generated by the company from its core business activities during the period.
Why value investors care: Revenue is the top line — everything else flows from it. Consistent, growing revenue indicates durable demand for the company’s products or services. Value investors look for predictable revenue streams and watch for revenue concentration risk (too much dependence on a single customer, product, or geography). Revenue growth that outpaces the industry suggests competitive strength.
Cost of Revenue
The direct costs attributable to producing the goods or services sold, including raw materials, direct labor, and manufacturing overhead.
Why value investors care: Cost of revenue determines gross profitability. A company that keeps cost of revenue growing slower than revenue is improving its unit economics. Value investors compare cost of revenue as a percentage of revenue across competitors to identify companies with structural cost advantages, such as economies of scale or superior supply chains.
Gross Profit
The profit remaining after subtracting the direct costs of producing goods or services.
Why value investors care: Gross profit is the first test of a business model’s viability. High and stable gross margins suggest pricing power and a competitive moat. Warren Buffett has noted that companies with durable competitive advantages tend to have consistently high gross margins. A declining gross margin can signal rising input costs, pricing pressure, or a deteriorating competitive position.
Operating Expenses
Operating Expenses
The total costs incurred to run the business beyond the direct cost of producing goods, including R&D, sales and marketing, and general administrative expenses.
Why value investors care: Operating expenses reveal how efficiently management converts gross profit into operating income. A company with high gross margins but bloated operating expenses may not deliver profits to shareholders. Value investors look for operating leverage — the ability to grow revenue faster than operating expenses, which leads to expanding operating margins over time.
Research and Development Expenses
Spending on innovation, new product development, and technology improvements.
Why value investors care: R&D spending is an investment in the company’s future competitiveness. For technology and pharmaceutical companies, consistent R&D investment is essential to maintaining a moat. Value investors evaluate whether R&D spending translates into revenue growth and new products. However, excessive R&D relative to revenue with no visible payoff can signal poor capital allocation.
Selling and Marketing Expenses
Costs related to advertising, promotions, sales team compensation, and other marketing activities.
Why value investors care: These expenses reflect how much the company must spend to acquire and retain customers. Companies with strong brands and network effects often have lower selling and marketing expenses as a percentage of revenue. Rising marketing costs without corresponding revenue growth can indicate weakening demand or increased competition.
General and Administrative Expenses
Overhead costs including executive compensation, rent, utilities, insurance, legal, and accounting.
Why value investors care: G&A expenses should be relatively stable as a percentage of revenue and ideally decline as the company scales. Disproportionately high G&A can indicate management inefficiency or excessive executive compensation. Value investors compare G&A ratios to peers to assess operational discipline.
Selling, General and Administrative Expenses
The combined total of selling, marketing, and general administrative costs. Some companies report these together rather than separately.
Why value investors care: SG&A as a percentage of revenue is a key efficiency metric. Companies with durable competitive advantages (strong brands, network effects, switching costs) often have lower SG&A ratios because their products sell themselves more easily. A SG&A ratio that is declining over time while revenue grows signals improving operational efficiency.
Cost and Expenses
The total of all costs and expenses, including cost of revenue and all operating expenses.
Why value investors care: This is the all-in number that determines operating profitability. By tracking total costs and expenses as a percentage of revenue over time, value investors can see whether the overall cost structure is improving or deteriorating. Sudden spikes may indicate one-time charges, restructuring, or fundamental business problems.
Other Expenses
Miscellaneous expenses that don’t fit into the standard operating categories.
Why value investors care: Value investors scrutinize “other” categories because companies sometimes bury significant recurring costs here to make core operating results look better. If other expenses are consistently large, it’s worth digging into the footnotes to understand what they contain.
Operating Income & EBITDA
Operating Income
Profit generated from core business operations, before interest and taxes.
Why value investors care: Operating income is the purest measure of how well the core business performs. It strips out the effects of capital structure (interest) and tax jurisdiction, letting you compare businesses on operational merit alone. Consistently growing operating income is one of the strongest signals of a high-quality business. Value investors often prefer operating income to net income for comparing companies because it’s less affected by one-time items and financing decisions.
Depreciation and Amortization
The non-cash expense that allocates the cost of tangible assets (depreciation) and intangible assets (amortization) over their useful lives.
Why value investors care: D&A is a real economic cost — assets do wear out and need replacing — but it is a non-cash charge, meaning it doesn’t directly affect cash flow in the period. Value investors add D&A back to calculate EBITDA and cash flow metrics. However, companies with very high D&A relative to revenue are capital-intensive and may require heavy reinvestment just to maintain current operations. Compare D&A to capital expenditures: if capex consistently exceeds D&A, the company is investing for growth; if capex roughly equals D&A, the company is just maintaining its asset base.
EBIT
Earnings Before Interest and Taxes. In most cases, EBIT equals operating income unless there are significant non-operating items.
Why value investors care: EBIT allows comparison of operating profitability across companies with different debt levels and tax situations. It’s the numerator in the EV/EBIT ratio, which many value investors consider one of the best valuation multiples because it focuses on the earnings power of the underlying business.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization.
Why value investors care: EBITDA approximates the cash-generating ability of the core business before capital allocation decisions. It is widely used in EV/EBITDA valuations, especially for comparing companies across industries with different capital intensities. However, value investors should be cautious: EBITDA ignores the real cost of replacing assets. As Buffett has pointed out, treating D&A as “not a real expense” can be misleading for capital-intensive businesses. EBITDA is most useful for asset-light businesses where D&A is small.
Interest & Non-Operating Items
Interest Expense
The cost of servicing the company’s debt (bond interest, loan interest, etc.).
Why value investors care: Interest expense reveals the burden of the company’s debt. A high interest expense relative to operating income (low interest coverage ratio) signals financial risk. Value investors prefer companies where operating income comfortably covers interest expense by a wide margin (an interest coverage ratio of 5x or higher is often considered safe). Rising interest expense without corresponding growth in operating income is a warning sign.
Interest Income
Income earned from the company’s cash holdings, short-term investments, or lending activities.
Why value investors care: Interest income can indicate a strong cash position. For non-financial companies, significant interest income suggests the company is sitting on substantial cash reserves, which could be a sign of financial strength or, conversely, poor capital allocation (the cash might be better deployed in the business or returned to shareholders).
Net Interest Income
The difference between interest earned and interest paid.
Why value investors care: A positive net interest income means the company earns more on its cash and investments than it pays on its debt — a sign of a strong balance sheet. For banks and financial institutions, net interest income is the primary revenue driver. For non-financial companies, a negative net interest income is normal if the company carries debt, but the magnitude matters.
Non-Operating Income Excluding Interest
Income or losses from activities outside the company’s core operations, excluding interest items. This includes gains or losses from investments, foreign exchange, asset sales, and other peripheral activities.
Why value investors care: Value investors want to understand how much of the bottom line comes from core operations versus one-time or non-recurring items. Consistent reliance on non-operating income to meet earnings targets is a red flag. Conversely, large non-operating losses may be temporary and not reflective of the ongoing business.
Total Other Income Expenses Net
The net total of all non-operating income and expenses, including interest, investment gains/losses, and other items.
Why value investors care: This line bridges operating income to pre-tax income. Large swings in this number from period to period warrant investigation. Value investors typically focus on operating income for assessing business quality and treat this section as “noise” unless it reveals a structural issue like chronic debt burden or consistent investment losses.
Taxes & Net Income
Income Before Tax
Total earnings before income tax is applied.
Why value investors care: Pre-tax income shows what the business earns before the government takes its share. Comparing pre-tax income to operating income reveals the impact of non-operating items. Value investors use pre-tax income to calculate the effective tax rate and identify companies benefiting from (or burdened by) unusual tax situations.
Income Tax Expense
The total income tax charged against earnings for the period.
Why value investors care: The effective tax rate (income tax expense / income before tax) reveals whether the company pays a normal tax rate or benefits from tax advantages like R&D credits, offshore structures, or deferred tax assets. A very low effective tax rate may not be sustainable if tax laws change. Value investors also watch for large deferred tax liabilities, which represent future tax obligations.
Net Income
The bottom line profit after all expenses, interest, and taxes.
Why value investors care: Net income is the ultimate profitability measure and the basis for earnings per share. However, value investors know that net income can be distorted by one-time items, accounting choices, and non-cash charges. That’s why experienced investors cross-reference net income with free cash flow. If net income consistently exceeds cash flow from operations, the earnings quality may be poor.
Bottom Line Net Income
An adjusted version of net income that may include additional deductions or adjustments beyond the standard net income calculation.
Why value investors care: When present, this figure may differ from net income due to adjustments like minority interest, preferred dividends, or other items. Value investors should compare this to the standard net income to understand what adjustments are being made and whether they are recurring.
Net Income From Continuing Operations
Profit from business operations that the company expects to maintain going forward, excluding discontinued segments.
Why value investors care: This is arguably more important than total net income for forecasting future earnings. Discontinued operations can distort the picture — a company may report strong total net income due to selling off a division, but the ongoing business may be struggling. Value investors base their earnings projections on continuing operations.
Net Income From Discontinued Operations
Profit or loss from business segments that have been sold, shut down, or are being wound down.
Why value investors care: This is a one-time item that should be excluded from ongoing earnings estimates. However, frequent “discontinued operations” charges may indicate poor strategic decisions or an acquisition habit of buying and then selling underperforming businesses.
Net Income Deductions
Adjustments to net income such as preferred dividends, minority interest, or other items that reduce the income available to common shareholders.
Why value investors care: These deductions determine the net income available to common shareholders, which is the basis for EPS calculations. Large deductions (especially preferred dividends or minority interest) reduce what ordinary shareholders actually receive.
Other Adjustments to Net Income
Additional items that modify the reported net income, such as extraordinary items or accounting changes.
Why value investors care: Value investors treat these adjustments with skepticism. Companies sometimes use “adjustments” to inflate or smooth earnings. Understanding what these adjustments represent — and whether they are truly non-recurring — is critical for assessing true earnings power.
Earnings Per Share
EPS (Earnings Per Share)
Net income allocated to each outstanding share of common stock.
Why value investors care: EPS is the foundation of the P/E ratio, one of the most widely used valuation metrics. Growing EPS over time signals increasing profitability on a per-share basis. Value investors watch whether EPS growth comes from genuine earnings improvement or from share buybacks reducing the denominator. Both matter, but organic earnings growth is generally preferred.
EPS Diluted
Earnings per share calculated using the fully diluted share count, which includes stock options, warrants, convertible securities, and other potential shares.
Why value investors care: Diluted EPS is the more conservative and realistic measure because it accounts for all potential shares that could be issued. A large gap between basic and diluted EPS indicates significant stock-based compensation or convertible debt, which dilutes existing shareholders. Value investors prefer companies where the gap is small, meaning minimal dilution.
Share Counts
Weighted Average Shares Outstanding
The average number of common shares outstanding during the period, weighted by the time they were outstanding.
Why value investors care: This is the denominator in the basic EPS calculation. Value investors track this number over time: a declining share count indicates buybacks (management returning capital to shareholders), while a rising count indicates dilution from stock issuance or option exercises. Companies that consistently reduce their share count create value for remaining shareholders, all else being equal.
Weighted Average Shares Outstanding Diluted
The weighted average share count including all potentially dilutive securities (options, warrants, convertible notes, RSUs).
Why value investors care: The diluted share count reveals the true cost of stock-based compensation and convertible instruments. A large difference between basic and diluted shares is a warning sign of heavy dilution. Value investors use this number for conservative valuations and to assess how much ownership is being given away through compensation plans.
Reporting Metadata
Date
The end date of the reporting period (e.g., the last day of the quarter or fiscal year).
Period
The reporting frequency — typically annual (FY) or quarterly (Q1, Q2, Q3, Q4).
Fiscal Year
The fiscal year to which the reporting period belongs. Not all companies use a calendar year; some fiscal years end in non-December months.
Filing Date
The date the financial report was filed with the SEC.
Accepted Date
The date the SEC accepted the filing.
CIK
The Central Index Key, a unique identifier assigned by the SEC to each filing entity.
Symbol
The stock ticker symbol of the company.
Reported Currency
The currency in which the financial figures are denominated (e.g., USD, EUR).
Why value investors care about metadata: Accurate dating matters for time-series analysis. The filing date tells you when the information became public (important for backtesting strategies). The period field helps distinguish annual from quarterly results. Reported currency is critical when comparing international companies — always ensure you’re comparing apples to apples.