This income statement tells if a company is making money (Profitable) or not (Loss money).
The above is the the most recent income statement of China Hong Xing for FY2008. It shows that the company has made a net profit after tax of RMB448.5M for FY2008.
We observe that:
1) The profit is higher by 7.7% than last year's 416.453M.
2) This is not proportional to the growth rate of its revenue and gross profit. Revenue grew by 41% and GP, 35%. Why? Because the expenses are very high.
3) While revenue has increased by 41%, COG has also gone up even higher by 45%, resulting slightly lower GP growth rate.
4) Selling, distribution and admin expenses were up much faster by 55% - 68%, eroding profit although financial expenses has reduced by 21%.
5) Further, provision of income tax expenses have doubled.
Income statement tells us China Hong Xing is a profitable company with good growth records (If we have previous years' revenue to show) and probably better growth opportunity (If the company can show us its projections) in future. It also tells us it would have performed better with more tighter cost control.
Of course, the expenses have gone up probably due to higher cost of distribution and promotion to counter keener market competition.
Usually, there would be some details in the financial report about what and how these revenue and expenses incurred. In Hong Xing case, they said:
1) their high growth of revenue was due to increase in retail network to 3800 outlets, improved product mix and higher selling price,
2) higher trade discount to distributors resulting in lower GP,
3) the higher selling and admin expenses were needed for brand promotion and loss in currency exchange rate, higher salary and higher depreciation provided in line with business expansion,
It further tells about the new PRC tax requirements and how if it will affect income statement.
Of course, as a share holder, you can further probe into details of operations from the income statement to inquire how the management can improve the business. But, do you really want to know so much about the operations? It might prove to be too troublesome if your objective is just want to "buy low sell high"?
One very important indicator that can be derived from income statement is the ratio between profit and shares outstanding, i.e. EPS - which can be seen
here.
