Chapter 14 · Profit and Loss
From revenue to net profit
The statement is one long subtraction. Knowing what is taken out at each step is the whole skill.
The profit and loss statement covers a period — a quarter or a year — unlike the balance sheet, which is a single instant. It starts with what came in and subtracts, in order, until what is left belongs to shareholders.
| Line | Formula | What it tells you |
|---|---|---|
| Revenue | — | What the business sold |
| − Cost of goods sold | Direct cost of what was sold | |
| **Gross profit** | Revenue − COGS | What the product itself earns |
| − Operating expenses | Salaries, admin, selling costs | |
| − Depreciation & amortisation | Wearing out of assets, a non-cash charge | |
| **Operating profit (EBIT)** | Gross profit − OpEx − D&A | What the core business earns |
| − Interest / finance cost | The cost of borrowing | |
| − Tax | ||
| **Net profit (PAT)** | EBIT − interest − tax | What belongs to shareholders |
The margins, and what each isolates
- Gross margin = Gross profit ÷ Revenue. Is the product itself profitable?
- Operating margin = EBIT ÷ Revenue. Is the business, run as it is, profitable?
- Net margin = Net profit ÷ Revenue. After debt and tax, what actually survives?
Worked example
Revenue Rs 5,00,00,000; COGS Rs 3,00,00,000; operating expenses Rs 80,00,000; depreciation Rs 20,00,000; interest Rs 25,00,000; tax Rs 18,75,000.
- Gross profit = 5,00,00,000 − 3,00,00,000 = Rs 2,00,00,000 → gross margin 40%
- EBIT = 2,00,00,000 − 80,00,000 − 20,00,000 = Rs 1,00,00,000 → operating margin 20%
- Pre-tax = 1,00,00,000 − 25,00,000 = Rs 75,00,000
- Net profit = 75,00,000 − 18,75,000 = Rs 56,25,000 → net margin 11.25%
- EBITDA = EBIT + D&A = 1,00,00,000 + 20,00,000 = Rs 1,20,00,000
Notice interest consumed a quarter of operating profit. That is the single most useful thing this statement told us, and no margin on its own would have shown it.
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