To succeed in investing, you need to understand financial statements well—especially the profit and loss statement, also known as the income statement. It’s a tool that shows whether a business or company is truly making a profit or suffering losses.

In fact, the profit and loss statement isn’t as complicated as you might think. The basic principle is very simple: take all revenue and subtract all expenses. If revenue is greater than expenses, it’s a profit; if it’s less, it’s a loss. That’s all.

What you need to know is that the profit and loss statement provides more detail than just the final number. It breaks revenue down into multiple categories, such as main sales income and various other supplementary income. Expenses are also broken down in detail—for example, production costs, selling expenses, administrative expenses, and financial expenses—so you can see clearly where the money goes.

Reading the profit and loss statement clearly and understanding it follows a simple process. First, check which time period the statement covers: is it monthly, quarterly, or yearly? This helps you understand the context of the figures. Next, look at whether the business is making a profit or a loss, and examine the sources of revenue—where the income is coming from. For expenses, identify which line items are the biggest, because those may be reduced.

The profit and loss statement is very important for measuring financial performance. It helps executives and investors see the big picture of whether the business can generate profits and where those profits come from. The information in this statement is a key foundation for business decisions, such as whether to keep investing, how to adjust strategy, and what risks may exist in which areas.

When analyzing the profit and loss statement, you should look at profit at each stage. For example, gross profit shows how much the business can price products above costs; operating profit indicates how efficiently the business operations are running; and net profit is the final figure that shows how much profit remains after deducting all expenses.

Once you understand it, you’ll see that the profit and loss statement comes in 2 formats: the report format and the account format. In the report format, the items are arranged from revenue down to net profit in sequence, making it easier to read. In the account format, it’s shown in a T-shape, with expenses on the left and revenue on the right. Both formats have their own advantages.

When investors are considering investing in different businesses, being able to read and understand the profit and loss statement is an essential skill. However, don’t forget that investment decisions shouldn’t consider only the profit and loss statement. You should also look at other factors, such as the nature of the business, the management team, growth potential, and various technical information. Then, our investments will have a more solid foundation.