Getting Started: The Income Statement

EPS. Earnings per share (EPS ) can be found at the bottom of the income statement as well, usually after net income. It's the amount of profit that is attributable to each share of the company's common stock . While it doesn't necessarily tell you what kind of dividends you might get for each share you own, it's a terrific metric that can be used to compare one company against another. (You can use the benchmarking tips in "Getting Started: Fundamental Analysis" to make sure that you're making good comparisons.)

P/E Ratio. The price-to-earnings (P/E ) ratio is another great fundamental measurement. The P/E ratio (calculated by dividing the share price by EPS) can be used to try to figure out how over- or undervalued a company's stock is. If a company is trading at a high "multiple " (a P/E ratio that's much higher than others in its sector or industry), its share price might not accurately reflect the company's actual performance.

Margins. Margins (gross and net ) are a way of looking at a company's profit as a percentage of revenues. A company with a low net margin (net income divided by its revenues) might be much more vulnerable to suppliers increasing their prices. Also, companies with higher margins don't need to sell as much to end up with the same net income.

Remember, though, none of these numbers or rates are absolute "investable" metrics -- just because a company has a poor P/E ratio doesn't mean that you shouldn't invest in it -- but it should definitely be a big consideration.

Horizontal Insight and Expectations

When you analyze a company's income statement, horizontal analysis (looking at a company's income statement data over a period of time) can also be very valuable. If you're looking at a company with a net loss that's been getting closer and closer to profit over the past couple years, you might be witnessing a turnaround that can make you some money. Likewise, if you notice a downward trend in income (or maybe just an upward trend in expenses), it's often going to be a red flag.