To begin with, an experienced eye will look from top to bottom, and typically separate the income statement into three distinct segments: gross income, operating income and net income; each will be associated with the three concepts of gross margin, operating margin and net margin.

Gross profit is obtained by subtracting production costs from revenues. In practice, gross margin is particularly useful when comparing several companies in the same sector, in order to identify those with the most competitive production costs and/or the highest sales prices.

Taken in isolation, however, this indicator is of limited value and can even be misleading, since a high gross margin rate does not necessarily mean that a company is economically successful. See, for example, Dolby Laboratories, Inc: Caution is advised. On the other hand, a low gross margin rate in absolute terms does not preclude exceptional value creation over the long term, as demonstrated by Lockheed Martin, for example.

The same applies to operating profit, which is obtained by subtracting all administrative costs and discretionary expenses - those with variable geometry, such as marketing or R&D budgets - from gross profit. Here too, a common mistake is to equate a high operating margin with satisfactory economic performance.

Examples include Stellantis, whose buoyant cyclical effects boost margins from time to time, and make us forget that its profitability - i.e. the efficiency of the capital invested in its activities - remains mediocre, if not anaemic. In contrast, a group like Walmart has a very low operating margin in absolute terms, but its profitability over the cycle is breathtaking.

At the bottom of the table, net income - the "bottom line" in analysts' jargon - which is obtained by subtracting financing costs, so-called exceptional expenses and taxes from operating income, theoretically serves as the judge of a company's performance.In theory only, because net income is not always identical to real profit - that which is measured in hard currency, i.e. in cash, and which we therefore call "free cash flow" for the occasion.

A discrepancy between the two indicators, net income and free cash flow, typically arises when the company's investments - a tangible cash outflow - are greater than depreciation and amortization - which are simply accounting entries intended to smooth out the amount of these investments over several years.

In this respect, in highly capital-intensive businesses such as the automotive or steel industries, the income statement can sometimes look like a work of fiction, so much so that it's a mere bookkeeping entry. a work of fiction, as it often has little to do with the real capacity of companies to generate cash profits that can then be distributed to their shareholders.

A prime example is ArcelorMittal, which last year incurred a depreciation and amortization charge of $2.7 billion, while its actual capital expenditures amounted to $3.9 billion. This $1.2 billion difference may magically escape the sieve of the income statement, but it is nonetheless a very real cost that has to be borne...

On the other hand, in very low-capital-intensive businesses - referred to as "capital-light" in analysts' jargon - net income and free cash flow are often easily reconcilable. This is the case, for example, with a consulting business like that of French company Alten.

Finally, don't forget to measure profit trends - net income, free cash flow or both - on a per-share basis. A company which, over a given period, doubles its profit but quadruples the number of shares in circulation will have destroyed shareholder value.

On the other hand, a company which, over a given period, saw its profits halve but simultaneously divided its number of shares outstanding by four, would have managed to create value for its shareholders despite the headwinds.

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