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…

What Is Book Value And P/B ratio ?

Book Value

Definition : Book value is similar to equity of the company. If a company get closed, then after paying all of its liabilities (excluding intangible asset), the total value left will be the Book Value of the Company. Book value is written on Balance sheet.

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Formula : 

  • Book Value = Total asset - Total liabilities
Book Value Per Share,

  • Book value / share = Book value / Total no. of outstanding share
Note : Book value does not include Intangible assets i.e. Patents, Goodwill, Brand Value and Intellectual Property.

P/B ratio

Definition : also called Market-to-book ratio, is a financial ratio used to compare a company’s market price to its book value. It helps to determine a stock is Underpriced or Overpriced.

Formula : 

  • P/B ratio = Market price per share / Book value per share
P/B ratio is not used for IT companies like Apple, Facebook, Microsoft, etc because Book value does not include intangible asset and IT companies are largely based on intangible assets. P/B ratio is widely used in analysis of manufacturing companies, automobile, heavy-asset companies as they are widely based on tangible asset.

If P/B ratio is more than 1, then it means investors are more optimistic about a stock and willing to pay more money for that stock. Alternatively, if P/B ratio is less than 1, then it means investors do not believe in future growth of the stock and not willing to pay for the stock.
 P/B ratio is very useful in investment decisions like deciding future growth and gains of a stock by comparing a company’s book value to its market value.  Always remember to compare P/B ratio of a company with other company of same sector.

Other Financial Ratios


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