Components of the Income Statement: What They Tell Us

Sales or Revenues (“Net Sales” on the sample): Often called the

“top line”, it represents the amount the company sold during the
period.
Note #1: Looking at LLH’s Income Statement, you can see that the
corporation’s Net Sales have increased more than 34% since 2016

Cost of Goods Sold (“Cost of Sales” on the sample): The amount

it costs to make or procure the products or services an organization
sells. 
 
For manufacturing firms this includes the direct cost of raw materials,
labor, and 
manufacturing overhead to make the product. For wholesalers and
retailers, it is the purchase cost of the merchandise sold. For service
companies, it's the direct costs involved in providing the service.
Note #2: While LLH’s Net Sales increased 34% in 2018 over 2016,
their Cost of Sales grew just 29%. Thus, Sales outstripped Costs over
that 3-year period.

Gross Margin (“Gross Profit” on the sample; also could be "Gross

Loss"): This represents Net Sales minus Cost of Goods Sold. It’s
important to look at this number over time, as a trend. If there is an
increase in sales, with a drop in the gross margin to sales ratio, it's an
indication the company is growing weak on the top line and may be in
jeopardy.
Note #3: As can be seen on LLH’s Income Statement there has been
a very healthy increase in Gross Margin of 44% between 2016 and
2018. Therefore, in this case the “top line” (Net Sales) appears to be
strong.
Selling, General and Administrative Expenses (SG&A): Often
called “overhead” or “fixed costs”, these represent the organization’s
operational expenses not directly related to making or procuring their
products/services. For instance: salaries, commissions, marketing
costs, utilities, insurance, office supplies, etc. The goal is to keep
these expenses as low as possible. The trend of these expenses as a
percentage of sales should be watched closely to detect signs of
managerial inefficiency.
Note #4: In LLH’s case, the trend of these general expenses as
a percentage of sales is generally holding steady 
 2016: General Expenses = 29% of Net Sales
 2017: General Expenses = 27% of Net Sales
 2018: General Expenses = 28% of Net Sales

Operating Income: Gross Profits minus SG&A. The company’s

earnings from its normal operations, before interest, non-operating
income and costs, taxes, etc. Operating income is viewed by some
analysts as more reliable than net income as a measure of
profitability.
Note #5: LLH’s Operating Income grew 132% from 2016 to 2018. 

Interest Expense: The costs of the company’s credit lines and other

borrowings. interest expense is important because if it’s too high it can
significantly cut into a company’s profits.

Note #6: Interest expense showed a significant decrease from

2016 ($722,000) to 2018 (2,000).

Other (Income) Expense: Items not related to the primary business

activities of the company, for instance income from subletting space,
patents, unusual or infrequent gains and losses.
Income Before Income Taxes or Pretax Income: This is exactly
what the name describes. As there are many ways to avoid or
decrease income tax expense, some analysts consider this pretax
income as an accurate measure of the company’s profitability.
Note #7: Income Before Taxes has shown increases:
  2016 to 2017: 104%
 2017 to 2018: 17%

Provision for Income Taxes: What the organization expects to have

to pay in income taxes for the period.
Net Income: Called the “bottom line” – because it actually is the last
line of the statement. This is the profit (or loss) for the period covered
by the Income Statement. Obviously, you want to see a positive
number here; the higher, the better.
Note #8: LLH’s Net Income increased 96% 2016 to 2017 and
22% 2017 to 2018. Overall, there was a 138% increase in Net
Income from 2016 to 2018.

Earnings per Share (EPS) (Net Income per Common Share –

“Basic: and “Diluted” on the sample): Earnings per share are required
to be disclosed on the Income Statement. “Basic” is a weighted
average of shares outstanding and includes only stocks outstanding.
“Diluted” is also a weighted average, but is calculated as if all stock
options, warrants, convertible bonds and other securities that could
be transformed into shares have been. Diluted earnings per share is
considered the most reliable way to measure EPS.

Conclusions from Reviewing Data in the Income Statement

Overall, LLH Inc. has shown a tremendous improvement from 2016
through 2018 in all areas:
 Net Sales up 34%
 Gross Margin up 44%
 Operating Income up 132%
 Interest Expenses down more than 99%
 Net Income up 138%
The majority of the improvement occurred between 2016 and 2019.
However, considering the state of the U.S. economy in 2018, it looks
like LLH is weathering the recession well.
While a credit decision should never be made looking at one financial
statement alone, the numbers in LLH’s Income Statement certainly
show a very positive trend.