How to read a profit and loss statement

A profit and loss statement shows what a company earned over a period, what it spent, and what was left.

You'll hear it called the income statement or just the P&L. They're the same page, and it has the same shape at every company: revenue at the top, costs taken away one line at a time, and net income at the bottom.

So read it the way it's built. Start at the top and watch what each line removes.

Here's Costco's P&L for its 2023 fiscal year, in millions of dollars.

Revenue comes in two parts. Net sales is what shoppers paid for goods, and membership fees is what they paid for the card that lets them in.

Merchandise costs is what Costco paid its suppliers for those goods, which accountants call cost of goods sold. Take it away from net sales and you get gross profit: $237,710 million minus $212,586 million is $25,124 million.

Wages, rent and everything else it takes to run the warehouses are operating expenses. Subtract those and taxes and you reach net income, $6,292 million. Costco sold $237.7 billion of goods and kept $6.3 billion, or about 2.6 cents on each dollar.

The easiest mistake is reading the top line as the score.

Revenue tells you how big a company is, not whether it makes money. Costco has enormous revenue and a thin profit. A software company can have a tenth of the revenue and keep more of it. Neither is doing it wrong. They're different businesses.

The score is net income at the bottom. The story is in every line between.