Reading an Income Statement

An income statement flows top to bottom: Revenue, minus cost of goods sold, gives gross profit. Minus operating expenses gives operating income. Minus interest and taxes gives net income.

Gross margin tells you about pricing power; operating margin tells you about discipline. Software companies often show 80% gross margins, grocers 25%.

Watch the trend, not the single number. Margins compressing while revenue grows usually means the company is buying growth.