What is Profit&Loss (P&L) Statement ?

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Definition : Also known as Income statement, is a financial statement which shows expenses and revenue of a company during a particular period, usually a fiscal quarter or year.
Read : What Is Balance Sheet ?
Income Statement helps to convey the status of a company i.e. Company is making profit or suffering losses. It is very important to read Income Statement of a company before investing, both of recent and past years.
Note : Revenue : Total amount received from sales of goods and services. Expenses : Total amount spend in producing final product or service.
Structure of P&L Statement  Income Statement is divided into Five main section - Net sales, Cost of Goods Sold, Gross Margin, Operating Expenses and Net Profit Before & After Income Tax (Or Net Loss in case of Loss).
Net Sales : It is the sum of Gross sales excluding its returns, allowances and discounts.Cost Of Goods Sold : Amount of money used to produce the final product. For example cost of inventory, merchandise purchased…

Definition of Return On Equity (ROE)


Return On Equity (ROE)

Definition : also known as return on net worth, defined as measure of profitability that calculates the amount of profit a company generates with each rupee of shareholders’ equity. In common words, it is the amount of profit that a company earns from money invested by shareholders.

Formula : 

ROE is expressed as percentage.

  • ROE = Net Income ÷ Shareholder’s Equity

Note : Shareholder’s equity does not include preferred shares.
          
 So for more accurately,

  • ROE = Net Income (after taxes) - preferred dividend ÷ Common equity


Example :

Lets assume Company A generated ₹1 crore in net income in one year. If company’s shareholder’s equity is equals to ₹2 crore, then
ROE = ₹1,00,00,000 ÷ ₹2,00,00,000
         = ₹0.5  i.e 50%
In words, Company A generated ₹0.5 of profit for every ₹1 of shareholder’s equity, which means 50% of ROE. 

ROE is very useful in comparing the profitability of a company with other company of same industry. Using ROE we able to know, how efficiently a company invest their money to generate greater gains and growth for company and investor.

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The higher the ROE, more efficient is the company’s operation are making use of those funds
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ROE are also a factor of stock valuation and 15-20% of ROEs are generally considered good. ROE over the past 10 years can give you a better idea of company’s historical growth.

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