Reading the Income Statement

This is an orientation. It explains how the statement is organised and where each line is covered in depth. Every line below links to its full treatment in Pillar 24, which reads them one by one. Figures illustrate structure only and tie to Wexford Instruments (USD millions).

It could report revenue and net income and nothing between them. Instead it stops four or five times on the way down — and each stop separates a different kind of cost, so that a reader can see not just how much was earned but where it went.

Why the order is what it is

The sequence groups costs by what they are for, moving from the most directly attributable to the least.

Revenue — what customers were charged for what was delivered. Covered in Revenue: The Top Line.

Less the cost of making it, giving gross profit — the first test of whether the product itself earns anything. Covered in COGS, Gross Profit and Gross Margin.

Less the cost of running the company, giving operating income — sales, administration, research, depreciation. Covered in Operating Expenses and Operating Income, EBIT and EBITDA.

Less the cost of the financing, giving pre-tax income — interest, which reflects a decision about the balance sheet rather than about the business. Covered in Interest, Taxes and the Effective Tax Rate.

Less tax, giving net income — the only figure that belongs to shareholders. Covered in Net Income and EPS.

The logic of the order is that each stage removes a cost that is one step further from the product and one step closer to being a choice. Which is why operating income is the usual basis for comparing two businesses — everything below it describes how the company is financed and where it is taxed rather than what it does.

How to read it

Down the page once, for structure. Note where the money goes at each stage and which costs are large.

Then across the years, as growth rates rather than levels. This is the reading that carries information, because a margin tells you mostly what industry you are in while a change in margin tells you what is happening inside the company. Comparing each line's growth against revenue growth reveals whether a margin move came from the product or from the cost base — a distinction invisible in the margins alone.

And note what the statement cannot tell you. It says nothing about whether the profit became cash, nothing about the obligations behind the business, and nothing about timing. The three statements answer different questions and this one answers only its own.