The income statement is a basic record for reporting a company's earnings. Since earnings are a fundamental component in a firm's worth, it is essential for investors to know how to analyze different elements of this important document.

By analyzing an income statement properly, investors can begin to evaluate the effectiveness of the management of operations in the companies in which they are interested in investing. Proper income sheet analysis can help identify good investment opportunities. It can also reduce the risk involved with choosing a poor investment choice.

Most of the expenses a company incurs (raw materials, labor, rent, etc.) are straightforward items. In general, companies want to minimize these sorts of expenditures to ensure improved performance and profitability. For example, the less a company has to pay for the raw materials of the products it produces, the more competitive that company can become.

By applying various ratios to the figures found on a company’s income statement, investors can derive measurements that help them compare the Interest coverage financial strength of companies they want to invest in. is the measurement of how many times interest payments could be made with a firm's Profitability earnings before interest expenses and taxes are paid. is often measured in percentage terms in order to facilitate making comparisons of a company's financial performance against past years' performances and against the performance of other companies.

Sometimes an increase in company earnings can disguise an operating loss. If a company's operating expenses exceed its operating income, it has an operating loss. If it also has "income" from investments and tax benefits, this income can offset the loss and show an increase in earnings per share. However, if these other sources of non-operating income are not recurring, the un-expecting investor may come to an erroneous conclusion about the company's overall financial health.

Remember that the main purpose of the income statement is to report profitability. Because profitability is crucial in any investment decision, knowing some basic techniques of how to analyze the income statement should be a very important part in your development as an informed investor.