Income Statement

The income statement (profit and loss statement) reports performance over a period — a quarter or a year — cascading from revenue through cost of goods sold to gross profit, then through operating expenses to operating income, and finally through interest and taxes to net income. Each level tells a credit analyst something different: gross margin reveals pricing power and cost control in the core product; operating margin reveals whether overhead is proportionate; net income reveals what is left after the capital structure takes its share.

Under accrual accounting, revenue is recorded when earned, not when collected — so a profitable income statement says nothing about whether cash arrived. This is the single most important caveat for trade creditors: a customer can show record profits while its cash is trapped in receivables and its payments to you slip from 35 days to 60. Always read the income statement alongside the cash flow statement.

For trend analysis, normalize before comparing. Strip out one-time items (asset sales, PPP forgiveness, litigation), and in private companies, adjust for owner compensation that runs above or below market. A three-year view of revenue, gross margin, and operating margin — spread consistently — tells you more than any single year. Margin compression with growing revenue is a particularly common warning sign: the company is buying sales, often by taking on customers or jobs it should have declined.