Why should you read the P&L Statement? What is a profit and loss statement, and why is it important for investors?

Starting with the question: Is the business truly profitable?

Many investors often ask themselves: Does this business actually make money? Where does the money go? Why is there still profit despite seeming chaos? All the answers are in a document called Profit and Loss Statement or P&L, which in Thai is known as the งบกำไรขาดทุน.

This financial statement is not just a set of numbers but a story of the business that tells us:

• How much revenue the business generates
• What the money is spent on
• How much real profit remains after deducting all expenses

What is P&L? Basic Components

Profit and Loss Statement (P&L) is a financial report that shows the operating results of a business over a specified period, revealing whether the business is profitable or at a loss. It is based on the fundamental formula:

Total Revenue (Total Revenue) - Total Expenses (Total Expenses) = Profit or Loss

It seems simple, but in reality, the calculation involves many details:

• Total Revenue (Total Revenue): Cash or goods/services received from sales
• Total Expenses (Total Expenses): Money spent to operate, such as rent, advertising, wages
• Profit/Loss: The final difference (If revenue > expenses = profit, if revenue < expenses = loss)

Delving into the structure: Profit at each level

Not all “profits” are the same. The P&L shows multiple levels of profit, each indicating different aspects:

First: Gross Profit (Gross Profit)

Formula: Revenue - Cost of Goods Sold = Gross Profit

This level indicates how much the product/service sells above its cost. If an organization has a high Gross Profit, it suggests good pricing strategies or effective cost control.

Simple example: A shirt manufacturer sells one shirt for 500 THB, with production costs (materials + labor) at 200 THB. Therefore, the Gross Profit per shirt is 300 THB.

Second: Operating Profit / EBIT (Operating Profit / EBIT)

Formula: Gross Profit - Operating Expenses (Selling, Administrative) = Operating Profit

Here, we start deducting other necessary expenses to keep the business running: advertising, office rent, employee salaries. This figure indicates whether the core business operations are on a good track.

Final: Net Profit (Net Profit / Net Income)

Formula: Total Revenue - Total Expenses (Including taxes, bank interest) = Net Profit

This is the most “real” number—the money left after deducting all expenses. It shows how much the business can pay dividends to shareholders or reinvest.

Detailed structure of P&L calculation

Creating a P&L is not just subtracting numbers easily; it involves a structured process:

Every step is important because each indicates the cause of profit or loss.

Formatting P&L: Which format is correct?

There are two main formats commonly used:

1. Report Format (Report Form)

Arranged vertically, from top to bottom:

• Company name + report name + period
• “Revenue” section (with account numbers)
• “Expenses” section (with account numbers)
• Final: net profit or loss

Advantages: Easy to read, quickly understand performance

2. Account Format (Account Form)

Presented as a T-account, with expenses on the left and revenue on the right: