Profit and loss definition

What is a profit and loss statement?

A profit and loss (P&L) statement is a financial report that provides a summary of a company’s revenue, expenses and profit. It gives investors and other interested parties an insight into how a company is operating and whether it has the ability to generate a profit.

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Profit and loss statement example

A profit and loss statement is calculated by taking a company’s total revenue and subtracting the total expenses, including tax. If the resulting figure – known as net income – is negative, the company has made a loss, and if it is positive, the company has made a profit.

Why is a P&L statement important to investors and traders?

P&L statements are important to investors and traders as they offer an in-depth look at company performance. Generally, one negative P&L is seen as a warning sign, while a few in succession are taken to mean that there could be something fundamentally wrong with the company’s operations.

However, sometimes negative profit and loss statements will not deter investors if they see the company as having strong long-term potential. An example would be Twitter, which didn’t earn a profit until Q4 2017. Investors stuck with the company because they believed in its potential and in its ability to eventually yield a profit.

Profit and loss statements are usually looked at in conjunction with a company’s balance sheet – which reports a company’s assets, liabilities and shareholders’ equity – and cash flow statement – which shows any changes in balance sheet accounts and income.

Profit and loss statements are a form of fundamental analysis as they enable traders to gauge how worthwhile it is to buy or speculate on a certain company’s stock. This is because P&L statements are essentially an insight into how the company is being run, and as such, they can show whether the company is being run in a profitable way or not. It is with this information that a trader may decide to open or close a position.

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