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A quick guide to understanding the P&L Statement

July 2016

July 14, 2016 | 15:45 | Dubai 

As is well known, amongst the statements used to analyse a company, 3 of the most important ones are

  • Profit & Loss statement
  • Balance Sheet
  • Cash Flow

With the Q2 earnings season around the corner, it is useful to get a grasp around the simplest of these, the P&L statement.

All P&Ls are based on a very simple formula:

Sales – Costs = Profit

It really is that simple and consists of those 3 elements. Everything else you see within a P&L is detailing of these 3 elements. Here’s a look at the same for Emaar Properties:

Exhibit 1

Here’s a more detailed version of the same,

Exhibit 2

Each of these terms outlined above would be detailed based on the business. It is useful to take a glance across the same and understand the core source of revenue for the business, incase there is more than 1. For example, in the case of Emaar Properties, revenues is outlined below

Exhibit 3

As seen, revenue for Emaar Properties comes from 3 different sources, Property Sales, Hospitality and Leasing & Related activities. As seen above, you can immediately sense the source of revenue growth: Sale of Villas and Leasing & related activities. Similarly, one can get an understanding into the costs.

Sales less the Cost of Goods Sold gives one the gross profit (also known as gross margins). This is the money the business earns after it subtracts the cost of delivering its product and/or services (all direct costs). Other costs are those not directly related to the product/ service and may come under the ambit of Selling, General and Administrative costs (SG&A). Gross Profit less the SG&A leads to the net profit.

Some essentials you may use based on the P&L statement:

  • Sales/ revenue growth, both on a QoQ basis and more importantly on a YoY basis
  • OPM (Operating Margin) or Gross Profit Margin (GPM) which is the ratio of the Gross Profit i.e (Sales – COGS) / Sales. An improvement signifies efficiency wrt to costs handling
  • EPS/ Net Profit growth: Ultimately, it is why you are looking at the P&L statement. Again looks the the QoQ and YoY change. Also, the EPS helps determine the valuation based on the PE ratio, for one.

Source of charts: Emaar Properties released quarterly reports

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