The P&L: where each ₹100 of sales goes

By the end of this lesson

Every line of a P&L, top to bottom, in plain words
The difference between operating profit and net profit — and why it matters
How to spot profit that came from something other than the business

Picture this

Ravi's year, as a subtraction

Ravi's shop sold ₹100 of goods. Now watch the ₹100 get eaten, one bite at a time.

₹62 went to buying the goods he sold. ₹18 went to rent, salaries, electricity, transport. ₹5 was the wear and tear on his van and shop fittings this year. ₹4 went to the bank as interest on his loan. ₹3 went to the taxman.

₹8 is his. That's net profit. And every one of those bites has a name that professionals use — that's all a P&L is.

The ladder, line by line

A P&L, top to bottom

Revenue / Net sales
In plain words: Everything sold this period
What it tells you: Size, and whether the business is growing
− Cost of goods sold (COGS)
In plain words: What the sold goods cost to make or buy
What it tells you: Raw-material and input pressure
= Gross profit
In plain words: What's left after making the product
What it tells you: Pricing power. High = customers pay up.
− Operating expenses
In plain words: Salaries, rent, marketing, admin
What it tells you: Cost discipline; whether scale is helping
= EBITDA
In plain words: Profit from operations before wear-and-tear, interest, tax
What it tells you: The most-quoted profitability number
− Depreciation & amortisation
In plain words: The annual wearing out of machines, buildings, software
What it tells you: How asset-heavy the business is
= EBIT / Operating profit
In plain words: Profit from doing business, before financing
What it tells you: The cleanest measure of the business
− Interest / finance cost
In plain words: Rent paid to lenders
What it tells you: The debt burden. Compare against EBIT.
+ Other income
In plain words: Interest earned, dividends, one-off gains
What it tells you: Watch this — it isn't the business
= PBT
In plain words: Profit before tax
What it tells you: What the taxman sees
− Tax
In plain words: Corporate tax
What it tells you: A rate far from ~25% needs explaining
= PAT / Net profit
In plain words: The bottom line — the owners' share
What it tells you: Your slice comes from here
EPS
In plain words: PAT ÷ number of shares
What it tells you: The bottom line, per slice you own

Line	In plain words	What it tells you
Revenue / Net sales	Everything sold this period	Size, and whether the business is growing
− Cost of goods sold (COGS)	What the sold goods cost to make or buy	Raw-material and input pressure
= Gross profit	What's left after making the product	Pricing power. High = customers pay up.
− Operating expenses	Salaries, rent, marketing, admin	Cost discipline; whether scale is helping
= EBITDA	Profit from operations before wear-and-tear, interest, tax	The most-quoted profitability number
− Depreciation & amortisation	The annual wearing out of machines, buildings, software	How asset-heavy the business is
= EBIT / Operating profit	Profit from doing business, before financing	The cleanest measure of the business
− Interest / finance cost	Rent paid to lenders	The debt burden. Compare against EBIT.
+ Other income	Interest earned, dividends, one-off gains	Watch this — it isn't the business
= PBT	Profit before tax	What the taxman sees
− Tax	Corporate tax	A rate far from ~25% needs explaining
= PAT / Net profit	The bottom line — the owners' share	Your slice comes from here
EPS	PAT ÷ number of shares	The bottom line, per slice you own

Worked exampleRavi Electricals, FY25 P&L

Numbers in ₹ crore. Read it as the same ₹100 story, scaled up.

Revenue: 420.0
− Cost of goods sold: 260.4
= Gross profit: 159.638.0% margin
− Operating expenses: 75.6
= EBITDA: 84.020.0% margin
− Depreciation: 21.0
= EBIT: 63.015.0% margin
− Interest: 16.8
+ Other income: 4.2
= PBT: 50.4
− Tax @ 25%: 12.6
= PAT: 37.89.0% margin

Gross margin = 159.6 / 420.0 = 38.0%

EBITDA margin = 84.0 / 420.0 = 20.0%

Net margin = 37.8 / 420.0 = 9.0%

Interest eats 16.8 / 63.0 = 27% of operating profit

So → A decent business paying a meaningful toll to its lenders: more than a quarter of operating profit goes to interest before owners see anything. That single line is worth more attention than the headline profit.

The two profits that matter, and why they differ

Beginners look at net profit. Analysts look at operating profit first. The reason is simple: operating profit tells you how good the business is, while net profit tells you how good the business is after the decisions of the finance department and the tax code.

The two profits

EBIT (operating profit) − interest + other income − tax = PAT (net profit)

EBIT: what the business earned from operating — comparable across companies
Interest: a financing choice, not a business quality
Other income: money from outside the business — treasury, rent, one-offs
PAT: what actually belongs to shareholders

Two identical businesses can have the same EBIT and wildly different PAT purely because one borrowed and one didn't. Judge the business on EBIT; judge your risk on the gap between EBIT and PAT.

Where people lose money

Profit that didn't come from the business

Other income is the most under-examined line in Indian results. It legitimately includes interest on surplus cash — fine, and often a sign of a cash-rich company. It also includes one-time land sales, insurance claims, forex gains and write-backs.

The test: what percentage of profit before tax is other income? If a company's PBT is ₹100 Cr and other income is ₹45 Cr, then nearly half the "profit" did not come from selling anything. Next year, when there is no land to sell, profit collapses — and everyone calls it a shock.

Rule of thumb: other income above roughly 20–25% of PBT deserves an explanation you can find in the notes. If you can't find one, treat the profit as lower than reported.

Reading the trend, not the number

A single year's P&L is nearly useless. The same P&L across five years is where the business reveals itself — because the direction of each margin is a fact about competition, pricing power and cost control.

Five years of the same company — read the direction

Revenue (₹ Cr)
FY21: 240
FY22: 281
FY23: 324
FY24: 372
FY25: 420
Gross margin
FY21: 34.1%
FY22: 35.2%
FY23: 36.4%
FY24: 37.3%
FY25: 38.0%
EBITDA margin
FY21: 16.2%
FY22: 17.4%
FY23: 18.5%
FY24: 19.3%
FY25: 20.0%
Net margin
FY21: 5.1%
FY22: 6.0%
FY23: 7.1%
FY24: 8.2%
FY25: 9.0%

	FY21	FY22	FY23	FY24	FY25
Revenue (₹ Cr)	240	281	324	372	420
Gross margin	34.1%	35.2%	36.4%	37.3%	38.0%
EBITDA margin	16.2%	17.4%	18.5%	19.3%	20.0%
Net margin	5.1%	6.0%	7.1%	8.2%	9.0%

Revenue compounding around 15% while every margin expands is the signature of a business gaining strength: it is selling more and keeping more of each rupee. Rising revenue with falling margins is the opposite — buying growth with discounts.

What you want to see over 5 years

✓Revenue growing at a steady, believable rate
✓Gross margin stable or rising — pricing power intact
✓Operating profit growing faster than revenue (operating leverage)
✓Interest cost flat or falling as a share of EBIT
✓EPS growing roughly in line with PAT — no quiet dilution

What should make you slow down

✕Revenue up but gross margin sliding every year
✕Profit growth driven by other income, not operations
✕"Exceptional items" appearing in most years
✕Tax rate far below ~25% with no explanation
✕PAT rising while EPS stagnates — the share count is growing

Worth knowing

EPS vs PAT: the dilution check that takes five seconds

If net profit grew 30% but earnings per share grew 8%, the company issued a lot of new shares. Your slice of the pie got thinner even as the pie grew.

This is not automatically bad — money raised to fund genuine expansion can be excellent. It is only bad when it happens repeatedly with nothing to show for it. But you must notice it, and the only way to notice is to compare PAT growth against EPS growth.

Your two-minute P&L read

☐Revenue: growing? At what rate, over five years — not one?
☐Gross margin: rising, flat or falling? Falling is the earliest warning a business gives.
☐Operating profit: growing faster than revenue, or slower?
☐Interest: what share of operating profit does it eat?
☐Other income: what share of PBT? Above a quarter, go find out why.
☐Tax rate: near 25%? A very low rate is borrowed from the future.
☐EPS growth vs PAT growth: is my slice being diluted?

In one screen

1The P&L is one subtraction from revenue to net profit; every line names a different claimant on your ₹100.
2Judge the business on operating profit (EBIT); judge your risk on the gap between EBIT and PAT.
3Other income and exceptional items are profit that didn't come from the business.
4Five years of margins beat one year of profit, every time.

Check yourself

Nothing is scored or stored — the explanation after each answer is the point.

1/2

Revenue grew 22% but gross margin fell from 41% to 34%. What's the most likely story?

2/2

PBT is ₹200 Cr, of which other income is ₹80 Cr. What should you do?

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