What is a P&L?
The profit and loss statement or P&L is a table listing all the revenues and expenses of a company for a given financial year.
The P&L is part of the financial statements of the company along with the balance sheet and the cash flow statement.
Example of forecasted P&L
Below is an example of P&L taken from our business plan software.
The P&L reveals the past or future profitability of a business.
The P&L analysis is centered around 3 main factors:
- the growth
- the cost structure
- the profitability
Ideally a company should be able to grow its revenues and its net income.
Looking into the company's growth enables to analyse if the company has been able both to gain new clients and to pass part of the cost inflation to its customers.
A top line growth lower than inflation constitutes a negative signal for banks and investors as it suggests that the company's profitability has reached its maximum.
Analysing the P&L of a company over a couple of years generally gives a precise understanding of its cost structure.
The financial analyst will try to identify the split between fixed and variable costs in order to assess the operating risk of the company.
He will also try to analyse the evolution of the main cost buckets in order to get a sense of how well managed the company is.
The difference between the revenues and the expenses is a profit or a loss.
The analysis of the company's profitability is done at 3 different levels:
- at the operating level
- at a global level
- in a dynamic fashion
At the operating level it is key to have a positive and growing EBITDA. If the EBITDA is negative, the company is selling below profit and heads for the worst. If the EBITDA is decreasing, then the profitability of the company is reducing which could threaten its capacity to invest and/or meet its financial obligations.
At a more global level, the financial analyst will also look into the company's net income. A positive net income indicates that the company's profitability is likely to be sufficient to maintain its productive equipment and repay its debt.
The P&L analysis is carried out in a dynamic fashion using ratios in order to analyse the profitability trends accross several years.