Fundamental Analysis For Dummies, 2nd Edition

Chapter 5

Analyzing a Company’s Profitability Using the Income Statement

IN THIS CHAPTER

Understanding what a company’s profit is and how it’s reflected on the income statement

Finding out why learning to analyze the income statement is key to fundamental analysis

Digging into how to read an income statement and to understand a company better

Discovering how to compare a company’s reported profit to what is expected

In everything from sports to school, you've probably been trained to measure results. At the end of the game or class semester, you either get a score or grade that determines how well or poorly you did, and how you measured up to expectations and ranked against your peers.

When you measure the success of a company, you really don't do anything differently than when you gauge the results of last night's basketball game. Fundamental analysts carefully evaluate a company's income statement to see how well the company did, examining how much money it brought in, how much it spent to operate, and the final amount of profit it generated.

Companies lay out all of their critical information for you in their income statement. In this chapter, you dig into the parts of the income statement necessary for fundamental analysis. Better yet, this chapter gives you the tools to know how to read those parts, which is critical when you want to determine whether a company’s stock is cheap or expensive (see Chapters 10 and 11 for more on determining a stock's worth). Don’t let the cryptic ...