Chapter 8 of 15
How to Read a P&L Statement
Revenue, expenses, net profit — company profitability.
Anita was comparing two pharma companies to decide which one to invest in. Both were selling at similar prices and looked similar on the surface. Then her mentor suggested she open their Profit & Loss statements on Screener.in. Within minutes she saw that one company's net profit margin had grown from 10% to 18% over three years, while the other's had shrunk from 15% to 9%. The P&L statement told the real story that share prices hadn't yet fully captured.
What Is a P&L Statement?
The Profit & Loss (P&L) statement — also called the Income Statement — records all revenues earned and expenses incurred by a company over a specific period (quarter or year). Unlike the balance sheet (a snapshot), the P&L is a movie: it shows you the journey from top-line revenue to bottom-line profit over time.
The Journey from Revenue to Net Profit
Following is a representative P&L for a mid-size Indian pharma company:
- Revenue from Operations: ₹1,000 crore
- Less: Cost of Materials (COGS): ₹380 crore
- Gross Profit: ₹620 crore (62% Gross Margin)
- Less: R&D Expenses: ₹80 crore
- Less: Employee Costs: ₹130 crore
- Less: Other Operating Expenses: ₹90 crore
- EBITDA: ₹320 crore (32% EBITDA Margin)
- Less: Depreciation & Amortisation: ₹45 crore
- EBIT (Operating Profit): ₹275 crore
- Less: Finance Costs (Interest): ₹25 crore
- PBT (Profit Before Tax): ₹250 crore
- Less: Income Tax (30%): ₹75 crore
- Add: Deferred Tax Benefit (if any): ₹0
- PAT (Net Profit): ₹175 crore
- Net Profit Margin: 17.5%
This pharma company converts 17.5% of every ₹100 of revenue into net profit — strong for a manufacturing business and typical for quality Indian pharma companies.
EPS Calculation
Suppose the pharma company above has 50 crore shares outstanding: EPS = PAT / Shares Outstanding EPS = ₹175 crore / 50 crore shares = ₹3.50 per share
If the stock is trading at ₹70, then: P/E Ratio = ₹70 / ₹3.50 = 20×
Watch EPS trend over 3–5 years. If EPS grew from ₹1.50 → ₹2.00 → ₹2.80 → ₹3.50 over 4 years, that's a CAGR of ~33% — an excellent growth business.
Margin Profiles Across Sectors
| Sector | Typical Net Margin | Reason | Indian Example |
|---|---|---|---|
| IT Services | 18–25% | Asset-light, high-value services, low direct costs | TCS (21%), Infosys (17%) |
| Pharma | 12–20% | IP-driven, once R&D costs are recovered margins expand | Sun Pharma (18%), Cipla (13%) |
| FMCG | 10–18% | Strong brands enable pricing power | HUL (16%), Nestle (16%) |
| Automobile | 4–8% | High material costs, thin manufacturing margins | Maruti (6%), Tata Motors (4%) |
| Steel / Metal | 5–12% | Cyclical margins, high energy & raw material cost | Jindal Steel (8%) |
| FMCG Distribution | 1–4% | High volumes, tight margins, low differentiation | Distributors and traders |
A company whose net margin improved from 8% → 10% → 12% → 14% over four years is building pricing power, cutting waste, or scaling efficiently. This is more valuable than a company with 20% margin that has been declining. Always look at the trend, not just the absolute number.
Many companies report "exceptional items" below the operating line — one-time gains from selling a subsidiary, write-offs, or lawsuit settlements. These can make profit look better or worse than the actual business performance. Always check the PAT excluding exceptional items (sometimes called "adjusted PAT" or "adjusted EPS") for a true operational picture.
Reading Quarterly Results
Every listed Indian company must report quarterly results within 45 days of quarter-end. Key things to check in a quarterly result:
- YoY comparison: Revenue and profit vs the same quarter last year (Q3 FY26 vs Q3 FY25)
- QoQ comparison: Revenue and profit vs previous quarter (Q3 FY26 vs Q2 FY26)
- Margin trajectory: Did margins expand or contract? Why?
- Management commentary: What did management say about the next quarter's outlook?
What does EPS stand for in the context of stock analysis?
Key Takeaways
- The P&L statement flows from Revenue → Gross Profit → EBITDA → EBIT → PBT → PAT (Net Profit) — each step removes another layer of costs.
- EPS = PAT ÷ Shares Outstanding; consistently growing EPS is one of the best indicators of a quality business.
- Margin profiles vary dramatically by sector — IT and pharma typically have 15–25% net margins, while distribution and manufacturing operate at 3–8%.
- Always check for exceptional items that can distort reported profits; focus on recurring, operational profitability.