Lesson 17: Profit & Loss Statement (P&L)

Understanding the Profit & Loss Statement: How a Business Proves Its Growth

🎯 Learning Outcome

Understand Income, Expenses, and Net Profit in depth and learn how to identify growth stocks using profit behavior.

💡 Key Takeaway

Rising profits alone do not create a growth stock — rising quality profits do.

🔍 Introduction: Why Profit & Loss Statement Decides a Company’s Future

The Profit & Loss Statement, commonly called the P&L Statement, is the most powerful financial statement for investors. It answers one simple but critical question:
Is the business actually growing, or just surviving?

Many beginners believe that if a company shows profit, it must be a good investment. This is a dangerous assumption. A company can show profit even when its business model is weak, costs are rising, or future growth is uncertain. The Profit & Loss Statement helps us look beyond surface numbers and understand how money is earned, how it is spent, and what finally remains for shareholders.

If the Balance Sheet shows financial position and the Cash Flow Statement shows liquidity, the P&L Statement shows performance over time. This is why long-term investors rely heavily on profit trends to identify true growth stocks.

The Profit & Loss Statement always follows a logical flow. Money enters the business, gets reduced by various costs, and what finally remains is profit. Understanding this flow is more important than memorizing formulas.

The structure moves step by step:

• First, income is recorded
• Then, expenses are deducted
• Operating performance is measured
• Finally, net profit is calculated

Now we will study each component one by one, in depth.

💰 Point 1: Revenue (Income) – The Starting Point of Every Business

Revenue represents the total income earned by a company from its main business activities during a specific period. This is the first line of the Profit & Loss Statement and sets the foundation for everything that follows.

Revenue tells us whether:

• Customers are buying the product
• Demand is increasing or decreasing
• The company has pricing power

A business without growing revenue cannot become a growth stock, no matter how attractive its profit numbers look temporarily.

Example

Imagine a company that manufactures electrical fans.

• Money earned from selling fans is operating revenue
• Interest earned from bank deposits is other income

For investors, operating revenue is far more important because it shows real business demand.

Investor Insight

Consistent revenue growth over multiple years is the first signal of a potential growth stock. One-time revenue jumps should always be questioned.

Also Visit:

• 45 Weeks. 45 Lessons. From Basics to Advanced – Master Stock Market Investing in Less than 1 Year.
• Lesson 1: What is a Stock Market? Beginner’s Guide to Understanding Shares & Trading
• Lesson 13: Intraday vs Delivery. What trade to do!
• Lesson 14: Short Selling & Margin Trading
• Lesson 15: Settlement System: How Your Trade Becomes Real Money and Shares
• Lesson 16: Introduction: Understanding the Balance Sheet Analysis!

💸 Point 2: Expenses – The Silent Profit Killer

Expenses represent the costs incurred to earn revenue. This section reveals the true efficiency of management. Many companies fail not because revenue is low, but because expenses are poorly controlled.

Expenses typically include:

• Raw material costs
• Employee salaries
• Power, fuel, and logistics
• Advertising and marketing
• Administrative expenses
• Depreciation

A company may increase sales aggressively, but if costs rise faster than income, profits will shrink.

Example

Two companies earn the same revenue of ₹1,000 crore.

• Company A controls costs efficiently and earns ₹150 crore profit
• Company B has rising expenses and earns only ₹40 crore profit

Even with the same revenue, Company A is far superior.

Investor Insight

Always track expense growth vs revenue growth. If expenses consistently grow faster, future profits are at risk.

⚙️ Point 3: Operating Profit – The Real Strength of the Business

Operating Profit shows the profit earned purely from core business operations, before interest and tax. It removes financial and accounting noise and highlights business quality.

Operating Profit answers:

• Is the business model strong?
• Can the company control costs?
• Does it have pricing power?

Why Operating Profit Is Critical

Many companies show high net profit due to tax benefits or one-time income. Operating profit exposes whether profits are repeatable and sustainable.

Example

If a company earns ₹200 crore operating profit consistently every year, it shows business stability, even if net profit fluctuates due to external factors.

Growth Stock Rule

Strong growth stocks show rising operating profit margins, not just rising net profit.

➕ Point 4: Other Income & Other Expenses – The Misleading Zone

Other income includes earnings that are not related to the main business, such as:

• Interest income
• Asset sale profit
• Investment gains

While these numbers increase net profit, they do not indicate business growth.

Example

If a company sells land and earns a big one-time profit, net profit may jump sharply. But this does not mean the business has improved.

Investor Warning 🚨

Never consider a stock a growth stock if profit growth comes mainly from other income.

🧾 Point 5: Net Profit – What Shareholders Actually Earn

Net Profit is the final profit after all expenses, interest, and taxes. This is the amount that belongs to shareholders and is used to calculate EPS and dividends.

Net Profit reflects:

• Overall profitability
• Dividend-paying ability
• Long-term valuation potential

Example

If net profit grows steadily from ₹100 crore → ₹140 crore → ₹190 crore, it signals healthy growth, provided operating profit also supports it.

📈 Profit Growth vs Profit Quality (Most Ignored Concept)

Not all profit growth creates wealth.

High-Quality Profit Growth

• Comes from core operations
• Supported by revenue growth
• Maintains stable margins

Low-Quality Profit Growth

• One-time gains
• Tax benefits
• Asset sales

Investor Rule

📌 Always compare Operating Profit growth with Net Profit growth.
If both grow together → strong business
If only net profit grows → warning sign

🇮🇳 How Indian Investors Use P&L for Stock Selection

In the Indian stock market:

• FMCG companies show steady profits → defensive stocks
• Manufacturing companies show rising operating margins → growth stocks
• Companies with volatile profits → speculative stocks

Professional investors track 5–10 years of P&L data before investing.

Lesson 18: Cash Flow Statement
Learning Outcome: Operational, financing, investing flows.

Key Takeaway: Cash is king, not just profits.