How to Read an Income Statement Without Being an Accountant
The income statement—also called the profit and loss statement, or P&L—is the most widely read financial document in business. It tells you whether a company made or lost money over a given period. It appears in annual reports, bank applications, acquisition due diligence, and management reviews. Almost everyone who runs a business has seen one.
And yet, when you ask many business owners to explain what the different lines actually mean and how they connect, the answer is often vague. Revenue and net profit are clear enough. Everything in between—gross profit, EBITDA, EBIT, operating profit—tends to blur together.
This article is about removing that blur. Not by turning you into an accountant, but by giving you a clear mental model of what an income statement actually shows, why it’s structured the way it is, and what to look for when you’re reading one.
The big picture: what a P&L is trying to show
An income statement answers a simple question: starting from everything the business earned, after subtracting the various categories of costs in a logical order, how much is left?
The key word is “order.” The costs aren’t subtracted all at once—they’re removed layer by layer, and each layer reveals something different about the business. Understanding what each layer tells you is the core skill of reading a P&L.
Think of it as a waterfall. Revenue at the top. Each subsequent line removes a layer of costs and shows you what remains at that point. The final line—net profit—is what remains after everything has been removed.
Line 1: Revenue (or Turnover)
Revenue is the total value of what the business sold during the period—before any costs are deducted. It’s the number that tells you how much activity happened.
Revenue is important, but it’s incomplete by itself. A business with €2M of revenue and a 5% net margin makes €100K. A business with €500K of revenue and a 30% net margin makes €150K. The second business is more profitable despite being smaller. Revenue without margin context tells you scale, not health.
In aviation businesses, revenue typically comes from a combination of:
- Flight training fees (by course, by hour, or by programme)
- Aircraft rental
- Membership or subscription fees
- Maintenance and engineering services
- Aerial work contracts
- Fuel sales, hangar services, or ancillary activities
Understanding the composition of revenue—not just the total—is the first thing to check when reading an aviation P&L.
Line 2: Cost of Goods Sold (COGS) / Direct Costs
The next layer removes the costs that are directly tied to producing the revenue. These are the costs that wouldn’t exist if the revenue hadn’t happened.
For a flight school, direct costs typically include:
- Aircraft operating costs (fuel, oil, line maintenance, insurance allocated per hour)
- Instructor costs directly attributable to training hours delivered
- Course materials and examinations
What doesn’t go here: the chief instructor’s salary covering administrative and management time; the hangar lease; the front desk staff. These are overhead—they’re real costs, but they support operations broadly rather than being directly tied to individual revenue events.
Line 3: Gross Profit and Gross Margin
Gross Profit = Revenue − Direct Costs
Gross Margin = Gross Profit ÷ Revenue (expressed as %)
Gross profit is what remains after the direct cost of generating revenue. It’s the pool of money from which the business must cover all its overhead, pay for growth, and generate a return.
Gross margin is the percentage version—and it’s the one to watch over time.
A flight school generating €600K revenue with €360K of direct costs has a gross profit of €240K and a gross margin of 40%. If that margin was 45% last year, something changed: either prices came down, aircraft operating costs went up, or the mix of training shifted toward lower-margin activities. Any of these deserves investigation.
Gross margin is also the benchmark for pricing decisions. If a new service has a gross margin below your existing average, it’s diluting your overall margin. That might be acceptable if it drives volume or opens a new customer segment—but it should be a conscious choice, not an accidental one.
Line 4: Operating Expenses (OpEx)
After direct costs, the next layer removes the overhead costs of running the business—costs that exist regardless of the revenue level, or that vary with scale rather than directly with individual transactions.
Typical operating expenses in an aviation business:
- Management and administrative salaries not in direct costs
- Hangar, office, and facility leases
- Insurance not allocated to direct costs
- Marketing and sales costs
- IT, software, and administrative systems
- Professional fees (accountants, lawyers, regulatory advisors)
- Regulatory and certification costs
The split between what goes into direct costs and what goes into OpEx is partly a matter of convention and partly a management choice. The important thing is consistency—if you change the classification from year to year, comparisons become meaningless.
Line 5: EBITDA
After subtracting both direct costs and operating expenses, you arrive at EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortisation.
EBITDA = Revenue − Direct Costs − Operating Expenses
= Gross Profit − Operating Expenses
EBITDA is the closest the P&L gets to showing you the cash generation of the operating business, before the effects of how it’s financed (interest), where it’s based (taxes), and how its assets are accounted for (depreciation).
It’s the line that most investors and acquirers focus on first, because it allows comparison across companies with different capital structures and different asset bases. As covered in the EV/EBITDA article in this series, it’s also the basis for the most widely used valuation multiple in business transactions.
What EBITDA doesn’t tell you: whether the business is actually generating enough cash to replace its assets (the CapEx question), or what it costs to service its debts.
Line 6: EBIT (Operating Profit)
EBIT—Earnings Before Interest and Taxes—is EBITDA after subtracting depreciation and amortisation.
EBIT = EBITDA − Depreciation − Amortisation
Depreciation and amortisation (D&A) are non-cash charges that reflect the accounting consumption of assets over time. Adding them back in EBITDA removes their effect; including them in EBIT brings it back.
Why does EBIT matter if D&A are non-cash? Because they represent the real economic wearing-out of the asset base. A business that ignores depreciation in its analysis is effectively pretending its assets don’t age. EBIT gives a more realistic picture of the true operating cost once asset consumption is accounted for—even if no cash changes hands for those charges.
For aviation businesses running owned fleets, the D&A line can be significant. A school owning several training aircraft will have substantial annual depreciation. Comparing EBITDA between a school that owns its fleet and one that leases without comparing D&A (or the lease cost that substitutes for it) produces a misleading picture.
Line 7: Interest and Financing Costs
Below EBIT, the income statement removes the cost of debt financing: interest on loans, lease finance charges, and related costs.
These costs are below the operating profit line specifically because they reflect how the business is financed—not how it operates. Two identical businesses, one funded entirely by equity and one carrying substantial debt, will have the same EBIT but different pre-tax profits because of this line.
For businesses with significant aircraft financing (loans, finance leases), the interest line can be material. When reading a P&L for a business you’re considering acquiring, pay attention to whether the debt and its associated interest cost will transfer with the business—or whether they’ll be cleared at sale.
Line 8: Profit Before Tax (PBT)
PBT = EBIT − Interest and Financing Costs
Profit before tax is the operating result after financing but before the tax authorities take their share. It’s a useful intermediate line for understanding the pre-tax earning power of the business.
Line 9: Tax
The tax line reflects current period income tax obligations based on taxable profit—which is often different from accounting profit, as discussed in the depreciation article. Different jurisdictions have different rates; different structures have different effective rates. The tax line alone rarely tells you much without understanding the underlying tax position.
Line 10: Net Profit (Bottom Line)
Net Profit = PBT − Tax
Net profit is what remains for the owners after every category of cost has been removed. It’s what can be distributed as dividends, retained in the business to fund growth, or used to repay debt.
Net profit is important, but it’s one of the more manipulable lines in the P&L. It’s affected by the financing structure (interest costs), accounting choices (depreciation methods), tax planning, and one-off items. A business with consistent 8% net margins and stable revenue is probably healthy. A business with wildly variable net margins needs investigation—even if the average looks acceptable.
Reading a P&L: the questions that matter
When you open a P&L—whether your own business or one you’re evaluating—these are the questions worth asking in order:
Is revenue growing, flat, or declining? And is that trend consistent with what the narrative says about the business? Revenue growth with declining margins is a warning sign. Revenue decline with improving margins might indicate a strategic pivot toward higher-quality customers.
What is the gross margin, and is it stable? A shrinking gross margin over time means either pricing power is eroding or direct costs are rising faster than revenue can absorb. Both matter.
What is the EBITDA margin, and how does it compare to sector peers? A flight school with 15% EBITDA margins is performing quite differently from one with 25%, even if revenues are similar. Context matters—but benchmarks help frame the context.
Where is the D&A line, and what assets does it represent? Large depreciation relative to revenue suggests a capital-intensive business or a recent asset acquisition. Near-zero depreciation on a business with significant physical assets suggests either very old, fully-written-off assets (fleet renewal risk) or a lease-heavy model.
What is below EBIT? High interest costs relative to EBIT mean the business is heavily leveraged. An interest coverage ratio (EBIT ÷ Interest) below 2x is a warning sign of financial fragility.
Is net margin consistent with the business description? If a business presents itself as healthy and growing but has thin or negative net margins, dig into why: is it a timing issue, a structural cost problem, or something in the financing structure?
A note on one-off items and adjusted figures
Real P&Ls often contain one-off items—gains on asset sales, restructuring costs, litigation settlements, write-offs. These distort the underlying trend. A business that books a large one-off gain shows a misleadingly strong year; one that takes a restructuring charge shows a misleadingly weak one.
When reading a P&L for evaluation purposes, always ask: what is the “normalised” or “adjusted” result, stripping out items that won’t repeat? This is why due diligence on a business acquisition always involves asking for multi-year P&Ls and understanding the composition of each line, not just the totals.
The aviation-specific wrinkles
A few P&L patterns are particularly relevant when reading aviation business financials:
Owner compensation is often non-market. Many small aviation businesses are run by owner-pilots who underpay themselves. A business showing 20% EBITDA margins might show 8% if a market-rate manager replaced the owner. Normalise for this before drawing conclusions.
Maintenance timing creates lumpy costs. Aviation businesses have periodic large maintenance events (100-hourly, annual, engine overhaul) that don’t fall evenly across accounting periods. A year without a major scheduled maintenance event can look artificially profitable compared to the year before it. Multi-year averages give a more reliable picture than any single year.
Fleet composition affects almost every line. Owned aircraft create depreciation (EBIT impact) and financing costs (interest); leased aircraft create operating lease costs (above EBITDA). The same physical operation can look very different depending on whether it owns or leases its fleet—a detail that’s invisible without understanding the underlying structure.
Regulatory compliance costs can be lumpy. ATO approvals, audits, and regulatory changes create periodic cost spikes. Understanding whether these are expensed in the year incurred or amortised over time affects the comparability of P&Ls across periods.
Reading a P&L well isn’t about memorising accounting rules—it’s about understanding what each layer of the waterfall is telling you, and what questions to ask when the numbers don’t add up with the story. Most of the insight comes not from any single line but from the relationships between lines, the trends over time, and the comparison to a benchmark that makes sense for the specific business and sector.
If you’re reading an aviation business P&L as part of a potential acquisition or investment decision, and the story the numbers tell doesn’t match the story you’ve been given, that gap is usually where the most important questions live.