In 30 seconds
- The income statement covers a period and reads from top to bottom, from revenue down to net income.
- Gross profit, operating income and net income show at which step the money gets used up.
- Operating income is the best line for comparing businesses, because it doesn't depend on debt or taxes.
- Because many costs are fixed, a small drop in sales can sink profit: that's operating leverage.
- Be wary of adjusted earnings and of years with one-time items; look at the five-year trend.
Introduction
In its fiscal year ended May 31, 2025, Nike brought in $46,309 million in revenue, almost 10% less than the year before. A bad year, nothing more. But its net income fell from 5,700 to $3,219 million: a drop of 43.5%. How does a 10% slide in sales turn into a profit decline four times bigger? The answer is written out, line by line, in its income statement.
Explanation
The income statement (the profit and loss statement, or P&L; in Spanish accounts, the "cuenta de pérdidas y ganancias") is the financial statement that tells the story of a period: a quarter or a year. It reads like a waterfall. Revenue comes in at the top, each step down subtracts one kind of cost, and you end at net income, which is what's left for shareholders.
Picture a neighborhood shoe store that sells $100,000 a year. The sneakers cost it 57,000 from the supplier, which leaves 43,000 in gross profit. It pays rent, wages and advertising, 35,000, and is left with 8,000 in operating income. Add the interest the bank pays on its savings, subtract taxes, and it keeps about 7,000 in net income. Now imagine a year when it sells 10% less. The rent and the wages don't go anywhere. That's why profit falls much harder than sales.
These are the lines to find, in this order:
Revenue (sales). Everything billed in the period. Check whether it's growing and where it comes from.
Cost of sales. What it costs to make or buy what was sold. Revenue minus cost of sales gives you gross profit.
Operating expenses. Marketing, administration, research and development. Subtract them from gross profit and you get operating income (EBIT): what the business itself earns.
Net interest and other financial items. Interest paid and received. This is where you can see how much debt the company carries.
Income tax. Divide it by pretax income and you get the effective tax rate.
Net income and earnings per share (EPS). EPS is net income divided by the shares outstanding, and it's the basis of the P/E ratio.
Each step divided by revenue is a margin; we cover them in our lesson on profit margins. And if you add depreciation and amortization back to operating income, you get EBITDA.
Formula
Gross profit = Revenue − Cost of sales
Operating income (EBIT) = Gross profit − Operating expenses
Pretax income = Operating income ± Net interest and other income
Net income = Pretax income − Income tax
Diluted EPS = Net income / Average diluted shares
Example
Let's take Nike, fiscal year ended May 31, 2025, from the 10-K it filed with the SEC (millions of dollars):
Step 1: revenue. 46,309 in fiscal 2025, against 51,362 in fiscal 2024: down 9.8%.
Step 2: gross profit. Cost of sales was 26,519 in 2025, so gross profit came to 19,790, a gross margin of 42.7%. In 2024 it had been 44.6%. Nike sold less, and at deeper discounts.
Step 3: operating expenses. 16,088 in total in 2025: 4,689 in marketing (Nike calls it "demand creation") and 11,399 in operating overhead, its term for general and administrative costs. Notice one detail: marketing had been 4,285 in 2024. It went up while sales were falling.
Step 4: operating income. 19,790 − 16,088 = 3,702 in 2025, an operating margin of 8.0%. Nike doesn't label this line; you work it out yourself by subtracting.
Step 5: net interest and other items. Net interest income of 107 and other income of 76 in 2025: pretax income of 3,885.
Step 6: taxes. 666 in 2025, an effective tax rate of 17.1%.
Step 7: net income. 3,219 in 2025, a net margin of 7.0%. Diluted EPS for 2025 was $2.16, down from $3.73 in 2024.
There's your waterfall. Revenue fell 9.8%; gross profit fell 13.5% because the margin narrowed; operating expenses barely came down, just 2.9%. Operating income in 2025 ended up 41% below 2024. That's operating leverage, and it works just as well on the way up as on the way down.
The table below compares the operating margin of four companies from very different industries. Before you look: do you think Nike has a higher operating margin than Walmart?
Real-data example
| Company | Ticker | Operating margin |
|---|---|---|
| NIKE, Inc. | NKE | 8.2% |
| Microsoft Corporation | MSFT | 46.8% |
| The Coca-Cola Company | KO | 29.6% |
| Walmart Inc. | WMT | 4.4% |
How to read it
How to read it
Operating margin is the line that compares companies best, because debt and taxes don't distort it. The "good" bar follows the sector guide on Kaplio's stock pages; "normal" and "weak" are rough guides:
| Sector | Good | Normal | Weak |
|---|---|---|---|
| Software | Over 25% | 15% to 25% | Under 15% |
| Branded consumer goods (beverages, sportswear, personal care) | Over 15% | 10% to 15% | Under 10% |
| Industrials | 12% or more | 8% to 12% | Under 8% |
| Retail and grocery | 3% to 6% | 2% to 3% | Under 2% |
More than any single year's level, look at the five-year trend and compare how fast each line grows against revenue. If expenses grow faster than sales, the margin erodes on its own.
Pitfalls and limitations
- "Adjusted" earnings. Plenty of companies publish a figure that leaves out the costs they don't like. The number that counts is the one in the annual report.
- One-time items. Restructurings or sales of subsidiaries move profit for a year. Nike booked $443 million in restructuring charges in fiscal 2024.
- Revenue that never gets collected. The income statement records a sale when it's invoiced. Check profit against operating cash flow, as in the lesson on financial statements.
- EPS pumped up by buybacks. With fewer shares, EPS rises even if profit doesn't grow.
Case in point: Nike, one year later
In its fiscal year ended May 31, 2026, Nike brought in $46,398 million, practically the same, with a gross margin of 42.9% and net income of $3,108 million. The waterfall hadn't reversed. When profit falls because of gross margin and costs that don't get cut, the fix is slow; had it fallen because of a one-time charge, it would have gone away by itself.
Practice on Kaplio
Frequently asked questions
Is an income statement the same as profit and loss?
Yes. Income statement, profit and loss statement and P&L are names for the same report: revenue at the top, then cost of sales, operating expenses, interest and taxes, with net income or net loss at the bottom. Spanish accounts call it the "cuenta de pérdidas y ganancias", which translates literally as a profit and loss account.
What is the difference between an income statement and a balance sheet?
The balance sheet is a snapshot of one day: what the company owns, what it owes and what's left for shareholders. The income statement is the movie of a period: what it brought in, what it spent and what it earned. They connect because profit that isn't paid out flows into shareholders' equity on the balance sheet.
How do I get an income statement?
For a US public company, the full-year income statement is inside the Form 10-K annual report filed with the SEC, and quarterly versions appear in each 10-Q. You can download both for free from the SEC's EDGAR database or the company's investor relations site. Kaplio's stock pages also show the main lines for each company.