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5 components of P&L that influence Investor's Decisions

Created on 31 Aug 2019

Wraps up in 3 Min

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Updated on 10 Aug 2022

Ever wondered about what makes a person invest in one company and not in another?

On what basis do people decide whether they want to invest in a particular company in a sector? Well, continue reading to know about it. 

There are two types of Analysts. Which one are you? The Conservative type or the Risk Taking type?

Well, this blog is all about how these analysts observe the profit and loss statement of the company and its significant components which influence the investment decisions of people.

    

         

Continue reading to know how these analysts observe the profit and loss statement of the company and its significant components which influence the investment decisions of people.

Profit and loss statement is an income statement of the company, which represents how much profits has the organization made over the financial year. 
It summarizes the revenues, costs, and expenses incurred during a specified period, usually a fiscal quarter or year. 
These transactions in the statement provide information about a company's ability or inability to generate profit by increasing revenue or reducing costs or both.

Now, let us go through the five components of P&L that influence investment decision:

Sales growth  
  • Referred to as the average increase in the value of sales revenue of the company from year to year. 
  • It is an essential measure for the management of the company. It is a direct representative of the profitability and revenue of the company.
  • It should consistently increase over the years to reflect the growth of the firm.

 Example: 

Profit growth
  • Referred to as the growth in the profit earnings of the company over the years. 
  • It is calculated by using the percentage change formula.
  •  Helps us to identify how much increase or decrease has the company experienced in the profits.
  • Positive growth represents efficient and smooth working, whereas distressed fluctuations in the profits are not good indicators.

 Since the ultimate aim of any organization is to earn more profits over the years, it happens to be the main criteria on which the investors make their decisions about investing in a firm. 

Other income
  • Includes receipts from rent from property, interests, gains on the sale of assets, returns on investments, etc. and do not form a part of the incomes from regular business activities.
  • if the company is earning a good chunk from "other income," it indicates that the investments made are profitable. 
  • Higher-income indicates high liquidity and stability in the occurrence of any mishap in the future.
  • a lower-income indicates complete dependence on revenue through sales.  

    Interest
  • It be an income as well as an expense for the company. 
  •  Interest Income is added in the other income section, whereas the costs like interest payments on loans, bonds, debentures, etc. are deducted from total receipts.
  •  If the interest obligations of the company are high, it means that the company has borrowed in huge amounts. It concludes that the majority of earnings are spent to pay for these borrowings.
  •  A high-risk factor is generally not preferred by the conservative investors.  Therefore, the interest component is directly related to the type of investor and his risk appetite.
  • Risk takers will invest in the company even if the debt percentage is high.

For example, Future group's revenue has been increasing by 18% year to year. Its interest payment has almost increased by 32%, leading to a tight situation for the group.

Operating cost
  • cost that is incurred by the company on its regular business operations, which include costs of goods sold and related expenses of transportation, inventory management, etc.
  • A high operating cost could mean inefficiency of the part of a business process.  It can discourage investors as high operating costs lead to lower profit margins.
  • A considerably lower cost of operation is a sign of smooth functioning of business activities with minimum expenses.
  • It also shows that the company might be procuring raw materials at a cheaper rate.
Conclusion

Investing is for the benefit of the future, and one should always use their hard-earned money in a planned way for a safer and brighter future.
For a feasible and profitable investment plan, do go through the income statement as well as other financial statements of the company. 

Visit our other blogs for more information on Investing, Legal as well as Tax related data. 

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Deb P Samaddar

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Deb is a keen learner and eager to learn about the finance world. He is that person who would never stop talking, but my oh my, the words he uses, are not something a normal human would in a regular conversation. While the conversations are well, interesting, the write-ups are faultless. With an increased proclivity towards tech and language, he aims to capitalise on his interests as a content writer at Finology.

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