Income Statements and Company Life Cycles

Key Concepts

• Life Cycle of Companies
  • Birth, growth, maturity, decline, and exit.
  • Income statements reflect these life cycles.
  • Early stages: high revenue growth, losses.
  • Maturity: stabilized profits.
  • Decline: shrinking revenues and profits.

Analyzing Companies Through Income Statements

• Focus on key items to understand differences and commonalities across companies.

Young Company: Peloton

• Overview: Sells exercise equipment and subscription services.
• Revenue Growth: High, doubling yearly from 2017 to 2019.
• Gross Profit: Healthy, despite being young.
• Net Income: Losing money, expected for young companies.
• R&D: Considered an expense but debatable as an operating expense.

Growth Company: Netflix

• Overview: Mature growth company with global operations.
• Revenue Growth: Slower but substantial due to a larger base.
• Net Income: Positive, beyond the young growth phase.
• Extraordinary Items: Foreign currency translations, unrealized gains.

Mature Company: Coca-Cola

• Overview: Once a high-growth company, now mature.
• Revenue Growth: Low, stable revenues from 2017 to 2019.
• SG&A Expenses: Almost as high as cost of goods sold.
• Equity Income: Income from subsidiaries.
• Geographical Breakdown: Mixed with business breakdown, potentially confusing.

Declining Company: Toyota

• Overview: Traditional automobile manufacturer facing decline.
• Revenue Decline: 2020 revenues lower than 2019.
• Financing Operations: Includes a captive bank for customer financing.

Sector-Specific Income Statement Items

Commodity Companies

• Example: Total (French oil company).
• Unique Items: Excise taxes, exploration costs, non-controlling interest.
• Business Breakdown: Upstream and downstream operations.

Financial Service Companies

• Example: HSBC (global bank).
• No Revenues Line: Starts with interest income/expenses.
• Provision for Bad Debts: Write-offs for loans.
• Goodwill Impairment: Indicates past acquisition failures.

Pharmaceutical Companies

• Example: Dr. Reddy's Lab.
• Major Expense: R&D, treated as operating expense but functions as capex.

Accounting Standards and Comparisons

• Convergence: Global accounting standards are becoming more consistent.
• Comparison: Easier to compare companies now than in the past.
• Focus for Financial Firms: Net profit is the most telling metric.

Conclusion

• Income statements provide insight into a company's stage in its life cycle.
• Understanding sector-specific line items is crucial for accurate analysis.
• Accounting attempts to measure profits consistently, despite variations.