The income statement shows how much money a business (Also see Business Valuation Techniques for Accountants) makes and spends. To understand profitability, look at the revenue, expenses, and net income. Revenue is the money a company earns, while expenses are the costs of running the business. The difference between them is the net income, which tells if the business made a profit or a loss. If you need help analyzing your income statement, contact an accounting firm in Kota Kinabalu for professional advice. 

First, take a closer look at the gross profit margin, which is an important measure of a company’s profitability. It is determined by first subtracting the cost of goods sold (COGS) from the total revenue generated by the business (Also see Accounting for Small Business Entities). After obtaining this figure, it is then divided by the total revenue to calculate the percentage of profit earned before accounting (Also see Bookkeeping and Accounting System Weakness) for other expenses. This indicates the profit earned after covering production expenses. A higher gross profit margin suggests that the company operates efficiently in producing goods or services. 

Next, examine the operating profit margin. This is calculated by subtracting operating expenses from gross profit, then dividing by revenue. Operating expenses include rent, salaries, and marketing costs. A high operating profit margin means the business controls costs well. 

Then, look at the net profit margin. This is found by dividing net income by revenue. It shows the final profitability after all expenses, including taxes and interest, are deducted. A strong net profit margin means the company is financially healthy. 

By analyzing these three profit margins, businesses can understand their financial (Also see Understanding Profitability Ratios in Financial Reporting) performance. Comparing them over time or with competitors helps make better business decisions.