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…

Debt To Equity Ratio - D/E ratio

Before moving to D/E ratio first we need to understand difference between debt financing and equity financing.

Two main types of financing :

1. Debt Financing : Taking loans from banks which need to pay back in specified time with additional fees or interest.

2. Equity Financing : Company raise funds from public through IPO, in exchange company offers ownership equity to the public. Company no need to return the money and therefore no additional fees is charged. One who buy shares called shareholders. Shareholders earn money through Capital appreciation and dividends.

D/E ratio 

Definition : Debt to equity ratio used to know the relative proportion of company’s finance from debt and shareholder’s equity. In simple words, how much capital a company holds from debt and shareholder’s equity.

Formula :

  • D/E ratio = Debt ÷ Equity
In Standard words,

  • D/E ratio = Total Liabilities ÷ Shareholder’s equity
*Total liabilities = debt + company’s liabilities

Example: Company’s Assets and liabilities are stated on the Balance sheet. So, if at the end of fiscal year 2017, company A has total liabilities of ₹10,00,000 and total shareholder’s equity of ₹20,00,000.

Using given equation,

D/E ratio = toal liabilities/shareholder’s equity
               = 0.5
Therefore, D/E ratio of Company A is 0.5 i.e. company A has more equity as compared to debt, which is a good signal to invest in this company.

Check Out : Top Stocks In Range Of ₹200-₹300 To Buy For Long Term

Conclusions from equation :

  • If D/E ratio is less than 1, then it means company has more equity and less debt. Investing in such companies contains less risks.
  • If D/E ratio is more than 1, then it means company is borrowing too much. Company has more debts and less equity. It could be high risky to invest in such stocks.
  • If D/E ratio is equals to 0, then company holds equal debt and shareholder equity. Investing in such companies contains moderate risk.
Note : Always remember to compare D/E ratio with companies of same industry for e.g. pharma stocks with other pharma stock or consumer stocks with other consumer stocks and so on.


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