Ultimate Guide: Use the Income Statement to Pick Stocks

Ultimate Guide: Use the Income Statement to Pick Stocks

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Former stock market analyst shows you the Wall Street way to analyze the income statement and pick better stocks to buy. Don’t invest another dime until you know how to read the financial statements.

I see a lot of stock picking videos here on YouTube but none give you the tools to do your own investing. That’s why I started this series of videos, sharing the exact information I learned to become a professional market analyst.

In this video, we’ll dig into the income statement, one of the three financial statements and the backbone of stock analysis. We’ll start with the basics like what the income statement shows and how analysts use the statement to compare stocks. I’ll then reveal two techniques for income statement analysis that will make you a better investor.

Watch the rest of the videos in the series including options strategies, financial statement analysis and how to beat bad investor behaviors! https://www.youtube.com/watch?v=hiRjnyQyHj4&list=PLjsZ3KrTlZowT22ixi5trdMq8AM_hDnbr&index=1

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The income statement, also called the profit & loss statement, shows the earnings of a company from the money it collects on sales all the way through costs it pays and to net income. It seems straight forward but management has all kinds of tricks it can use to make earnings look better so the analyst’s job is to adjust the income statement back to reality before comparing stocks.

Explaining the income statement starts with a basic idea of what it shows from revenue down to earnings. From sales, the company removes its cost of goods and other expenses to suppliers, before the first profitability measure, gross sales.

Next on the income statement is the most important section, operating expenses and the operating margin. This is the core profitability of the company and where analysts spend the most time.

Analyzing the income statement means understanding how management can change the numbers and being able to change them back. You’ll want to compare one company’s financial statements against another so they will both need to show the same layout and accounting.

Once you’ve adjusted the income statement, there are two techniques analysts use to pick investments. Creating a common-size income statement means taking each number as a percentage of sales. This helps to show trends as well as for comparison. Analysts also use other ratios for profitability, debt leverage and valuation with numbers from the income statement.

0:00 Income Statement Analysis
2:26 What is the income statement?
4:00 What does the income statement show?
9:11 How do stock market analysts use the income statement?
10:26 How to use the income statement in stock market analysis
16:28 How to analyze the income statement for trends
22:30 Income statement ratio analysis
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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.

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