P&L Statement Secret Explanation: Why Are Investors Focusing on This Financial Data?

If you want to understand whether a company is making money or losing money, the Profit and Loss Statement (P&L Statement) is the most straightforward answer. This financial report tells you where the company’s revenue comes from, where the money is spent, and how much is left in the end.

For investors and traders, understanding the P&L statement not only clarifies a company’s profitability but also helps predict its future development direction — which is why institutional investors regard it as the first threshold for decision-making.

What is a Profit and Loss Statement (P&L Statement)?

P&L (Profit and Loss Statement) simply records a company’s income, expenses, and final profit over a specific period.

Specifically:

• Revenue side: How much money the company earns from selling products or providing services
• Expenses side: How much the company spends to maintain operations
• Profit side: The actual money earned after subtracting expenses from revenue

For management, this report is like a mirror — it reflects whether the business is efficient, which cost areas can still be compressed, and which strategic directions should be adjusted next.

The core formula of the P&L

Understanding the underlying logic of the P&L report only requires remembering one formula:

Total Revenue - Total Expenses = Profit (or Loss)

Three key concepts

Total Revenue

• All cash and equivalents received from selling goods or services
• Includes direct sales revenue and all other income

Total Expenses

• Every penny spent to keep the business running
• Includes rent, marketing, employee salaries, etc.

Profit or Loss

• When revenue > expenses, it’s profit
• When revenue < expenses, it’s a loss

From revenue to net profit: five layers of profit breakdown

A company’s profit isn’t achieved overnight but is layered down step by step. Each layer tells a different story:

First layer: Gross Profit

Calculation: Sales Revenue - Cost of Goods Sold

This layer reflects the company’s pricing ability. If gross margin is low, it indicates potential issues with cost control or intense market competition leading to weak bargaining power.

Second layer: Operating Profit / EBIT

Calculation: Gross Profit - Operating Expenses (Selling & Administrative Expenses)

This is the most important indicator of core business profitability. The higher the EBIT, the healthier the company’s main operations.

Third layer: Earnings Before Tax (EBT)

Calculation: Operating Profit - Financial Expenses (Interest Expenses)

At this level, the company’s capital structure begins to show. If the company has too much debt, interest pressures will significantly lower EBT.

Fourth layer: Pre-tax Income

Calculation: EBT - Taxes

Taxation depends on the company’s profitability and local tax policies.

Fifth layer: Net Income

Calculation: Pre-tax Income - Income Taxes

This is the final profit that lands in the company’s pocket and the most direct indicator of its true earning ability.

Two formats of the P&L statement

Format 1: Report Form

Presented in a top-down logical order: