Stock Investing: Fundamental Analysis Using Company’s Income Statement

Key parts of an income statement:

Figure 1: International Business Machines Corp. (Ticker: IBM) Income statement (Source: Morningstar.com)

Taking in the Top Line: Revenue

Figure 2: IBM Revenue breakdown (Source: https://www.ibm.com/investor/att/pdf/IBM-4Q17-Earnings-Press-Release.pdf)

Tip: If you want to figure out how large a unit of a company is, divide the unit’s revenue by total revenue and multiply the result by 100.

Therefore, in our case, divide the Technology Services and Cloud Platforms revenue of $34,277 million by IBM’s total revenue of $79,139 million to arrive at 0.433. Multiply 0.433 by 100 to convert the result into a percentage of 43.3%. This means the Technology Services and Cloud Platform business unit contributed to 43.3% of IBM’s total revenue in 2017.

Tip: Subtract the “old” number from the “new” number, then divide by the “old” number and multiply by 100.

Tip: To perform common sizing, all you need to do is divide each cost and expense by total revenue and multiply by 100 to convert the number into a percentage.

Tip: It is better to use several years of data while performing common-sizing so that you can identify a trend. For instance, if a company’s research and development budget is soaring, you’ll spot the trend.

What is the company’s bottom line or profit?

Tip: Though net income is important, it should not be thought of as the end-all, be-all figure to focus on.

Types of Profit Margins

Tip: Using diluted shares is much more informative than using basic shares, because if and when securities such as stock options issued to employees and convertible bonds, are converted into shares of common stock, your stake in the company, or your piece of the total pie, gets smaller and smaller.

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