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

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…

Difference Between Book Value And Market Value

Book value is the value of a company according to its financial statement or books whereas Market value is the value at which investors trade (buy or sell) a particular stock.

Book value and market value have significant differences which are widely used in investment decisions specially for value investors.

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Difference between Book value and Market value  are as follows : 

1. When Market value is greater than Book value : This simply means investors are more optimistic about company’s assets to gain future growth and profit. Stock market assigns higher value to the such companies due to its earning power. Companies with consistent record of profitability usually have greater market value as compared to its book value.
Value investors are likely to stay away from such stocks as they prefer in stocks which are undervalued to its potential.

Note : P/B ratios are also helpful to understand the difference between market value and book value. 

For e.g If P/B ratio is greater than 1, this means  market value is greater than book value.

2. When Book value is greater than Market value : This is considered as the buying opportunity for Value Investors. Lower market value simply means investors has lost confidence in the company and believes that company will not be able to generate future profit and cash flows. In other words company is not worthy to invest. But value investors always seek such opportunity with hopes to turn market perception wrong. 

In this case, P/B ratio will be less than 1.

3. When Market value is equals to Book value : It doesn’t give any information to understand reason to believe that the company’s asset are better or worse than value stated on balance sheet.


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