This is the original lesson text as written at the time. Its examples, explanations and review questions are preserved and do not describe current market conditions.

Daily Economics, Business and Finance Study

September 22, 2026 (KST) · Day 3
Today's topic: Revenue, Operating Income and Net Income: Reading the Income Statement from Top to Bottom

1. Review of the previous lesson

On Day 2, we learned that PER, PBR, EV/EBITDA and FCF yield value companies using net income, equity, whole-business operating performance and free cash flow, respectively. Today, we examine how net income, the denominator of PER, and operating performance, the starting point for EV/EBITDA, are formed in the income statement. That is today's focus.

2. Today's core concepts

For a non-financial company, the income statement generally follows this sequence.

\[\text{Revenue}\rightarrow\text{Gross profit}\rightarrow\text{Operating income}\rightarrow\text{Income before tax}\rightarrow\text{Net income}\]

Each stage answers a different question.

Item	Key question
Revenue	How much did the company sell?
Gross profit	How much remained from the products or services themselves?
Operating income	How much remained after running the core business?
Income before tax	How much remains after interest and other gains and losses?
Net income for the period	How much ultimately remains after all taxes?

Higher revenue does not necessarily mean higher operating income or net income. The key to company analysis is understanding which costs revenue passes through before becoming profit. That is what to check.

3. Concepts explained

3-1. Revenue: The starting point of business activity

Revenue is the amount a company recognizes for goods or services provided during a period.

\[\text{Revenue}\approx\text{Sales volume}\times\text{Average selling price}\]

Actual revenue may combine products, services, subscriptions, advertising, licenses, maintenance and other types.

When analyzing revenue, distinguish the drivers of growth as well as the growth rate.

Higher sales volume: May indicate increased demand or market share
Higher prices: May indicate stronger pricing power or a pass-through of higher costs
Changes in product mix: May indicate a larger share of high-priced, high-margin products
Foreign-exchange effects: May reflect an increase when overseas revenue is translated into won
Acquisition effects: May not represent organic growth in the existing business

More important than saying “revenue increased 20%” is asking what caused the revenue increase. That matters more.

3-2. Cost of revenue and gross profit: Product-level profitability

Cost of revenue is the cost directly associated with producing the goods or services sold.

For manufacturers, it mainly includes:

Raw material costs
Production employee wages
Factory depreciation
Production equipment operating costs
Outsourced processing costs
Some inventory write-downs

Gross profit is revenue minus cost of revenue.

\[\text{Gross profit}=\text{Revenue}-\text{Cost of revenue}\]

\[\text{Gross margin}=\frac{\text{Gross profit}}{\text{Revenue}}\times100\]

If gross margin rises, generally consider these possibilities.

Higher selling prices
Lower raw material prices
Fixed costs spread over higher capacity utilization
A higher share of high-margin products
Fewer discounts and promotions
Improved production yields

Conversely, gross margin can fall despite revenue growth if low-priced products gain share or costs rise faster.

Some service or financial companies may not present gross profit in the same way as manufacturers. Check the income-statement structure for the industry.

3-3. Selling, general and administrative expenses: Operating costs beyond production

Selling, general and administrative expenses, or SG&A, are costs needed for business operations that are not directly associated with production.

Typical items include:

Sales and marketing expenses
Head-office employee costs
Research and development expenses
Advertising expenses
Fees and commissions
Rent
Stock-based compensation
Warranty expenses
Depreciation of head-office assets

Whether R&D is included in cost of revenue or SG&A can depend on a company's accounting presentation, so check the notes.

3-4. Operating income: Profit from the core business

\[\text{Operating income}=\text{Gross profit}-\text{SG\&A}\]

\[\text{Operating margin}=\frac{\text{Operating income}}{\text{Revenue}}\times100\]

Operating income is a key measure of the profitability of a company's core business.

If operating income grows faster than revenue, operating leverage may be at work. Once fixed costs are in place, a substantial share of additional revenue can flow through to profit.

Conversely, if revenue grows but operating income declines, check:

Product price cuts
Higher raw material costs
A higher share of low-margin products
Start-up costs for new factories
Higher R&D expenses
Higher marketing expenses
Inventory write-downs
Deteriorating yields or capacity utilization

Operating income is not a perfect cash measure. It includes expenses such as depreciation, provisions and stock-based compensation that differ from current-period cash outflows.

3-5. Non-operating gains and losses: Income and costs outside the core business

Below operating income, the statement reflects gains and losses outside the core business.

Major items include:

Interest income
Interest expense
Foreign-exchange gains and losses
Gains and losses on investments in associates
Gains and losses on asset disposals
Impairment losses
Gains and losses on derivative valuations
Other financial gains and losses

\[\text{Income before tax}=\text{Operating income}+\text{Non-operating income}-\text{Non-operating expenses}\]

If operating income rises but net income falls, possible causes include interest expense, foreign-exchange losses, impairment of investments or higher taxes.

Conversely, net income can surge despite weak operating income because of gains on selling land or subsidiaries. Do not interpret such net-income growth as improvement in the core business.

3-6. Net income and net income attributable to the parent

\[\text{Net income}=\text{Income before tax}-\text{Income tax expense}\]

Net income in consolidated financial statements may be divided into:

Net income attributable to owners of the parent: Belongs to shareholders of the parent company
Net income attributable to non-controlling interests: Belongs to outside shareholders of subsidiaries

When calculating a standard PER, the general rule is to use net income attributable to common shareholders of the parent, rather than total consolidated net income.

For example, if consolidated net income is 1,000 and 200 belongs to non-controlling interests, earnings attributable to the parent's shareholders are 800 (units: KRW 100 million).

3-7. Reading the income statement through margins

When company sizes differ, margins—profit as a share of revenue—are more useful for comparison than absolute profits.

\[\text{Gross margin}=\frac{\text{Gross profit}}{\text{Revenue}}\]

\[\text{Operating margin}=\frac{\text{Operating income}}{\text{Revenue}}\]

\[\text{Net margin}=\frac{\text{Net income}}{\text{Revenue}}\]

Margin change	What to examine first
Higher gross margin	Prices, costs, product mix, utilization and yields
Stable gross margin · Higher operating margin	SG&A efficiency and economies of scale
Higher operating margin · Lower net margin	Interest expense, exchange rates, impairment losses and taxes
Lower operating margin · Higher net margin	Possible one-off non-operating gains such as asset disposals

4. A simple numerical example

The following is a hypothetical educational income statement for manufacturing company A. Monetary amounts are in KRW 100 million units.

Item	Calculation	Amount
Revenue		1,000
Cost of revenue		-600
Gross profit	1,000-600	400
Selling, general and administrative expenses		-250
Operating income	400-250	150
Interest expense		-30
Foreign-exchange gains		+10
Other losses		-5
Income before tax	150-30+10-5	125
Income tax expense		-25
Net income for the period	125-25	100

Key margins

\[\text{Gross margin}=400\div1,000=40\%\]

\[\text{Operating margin}=150\div1,000=15\%\]

\[\text{Net margin}=100\div1,000=10\%\]

From revenue of 1,000, this company earns 150 from its core business after deducting production and operating costs. After interest expense, other gains and losses, and income taxes, final net income is 100 (units: KRW 100 million).

Identical net income can differ in quality

Suppose B also has net income of 100 (KRW 100 million units), with the following breakdown.

Operating income: 40 (KRW 100m)
Gain on land sale: 100 (KRW 100m)
Interest and other expenses: 15 (KRW 100m)
Income tax expense: 25 (KRW 100m)
Net income: 100 (KRW 100m)

Both A and B have net income of 100 (KRW 100 million units), but its nature differs.

A: Net income supported by core operating income of 150 (KRW 100m)
B: Core operating income of only 40 (KRW 100m), with net income dependent on a land-sale gain

If the companies have the same market capitalization, their current PERs may also match, but A has more recurring earnings. Therefore, recalculate B's valuation using normalized net income that excludes the one-off disposal gain.

5. Practical use in stock and company analysis

① Break down the drivers of revenue growth

After identifying revenue growth, examine it in this order.

\[\text{Revenue growth}=\text{Volume effect}+\text{Price effect}+\text{Product mix effect}+\text{FX effect}+\text{Acquisition effect}\]

For semiconductor companies, shipment growth, average selling price (ASP), product mix and exchange rates are key. A higher share of HBM and high-capacity server DRAM can improve both revenue and gross margin without a major increase in overall shipments.

② Check whether profits grow faster than revenue

Compare these two hypothetical situations.

Category	Revenue growth	Operating income growth	Interpretation
Company C	+10%	+25%	Possible cost improvements, fixed-cost leverage or better product mix
Company D	+10%	-5%	Possible higher costs, price cuts or increased SG&A

Even if revenue and operating income both grow, a declining operating margin may indicate weaker growth quality.

③ Find out why operating income and net income move in different directions

Operating income rises + Net income falls
→ Possible higher interest expense, FX losses, impairment losses or taxes
Operating income falls + Net income rises
→ Possible one-off factors such as asset-sale or investment gains
Both operating income and net income rise
→ Further examine recurring earnings and cash conversion

④ Do not use company-reported adjusted earnings uncritically

US companies often report non-GAAP or adjusted earnings alongside GAAP net income. Korean companies may also discuss adjusted results excluding one-off factors.

Adjusted earnings can help reveal business trends, but be careful when the following costs are repeatedly excluded.

Stock-based compensation
Restructuring costs
Acquisition-related costs
Amortization of intangible assets
Recurring impairment losses

If a cost excluded as “one-off” occurs every year, it may be economically recurring.

⑤ Do not confuse earnings with cash

Net income of 100 does not mean cash increased by 100 (units: KRW 100 million).

Increase in credit sales
Increase in inventories
Depreciation
Provisions
Stock-based compensation
Capital expenditure
Debt repayment

These items create differences between net income and cash flow. Later lessons explain how the income statement connects to the cash flow statement.

6. What to look for in disclosures

Korean companies: DART

Financial Supervisory Service DART Open an annual or quarterly report there and check in the following order.

Where to look	Key information
Consolidated financial statements → Consolidated statement of comprehensive income	Revenue, operating income, income before tax and net income
Notes to consolidated financial statements → Operating segments	Revenue and profit by business and geography
Notes → Revenue from contracts with customers	Revenue types and recognition policies
Notes → Expenses by nature	Raw materials, employee costs, depreciation and other expenses
Notes → Selling, general and administrative expenses	R&D, advertising, fees and other costs
Notes → Finance income and finance costs	Interest and foreign-exchange gains and losses
Notes → Income taxes	Effective tax rate and one-off tax effects
Notes → Earnings per share	Basic and diluted EPS and the share counts used
Description of the business	Revenue by product, prices, raw materials, production capacity and utilization

When comparing results, always align:

Consolidated versus separate financial statements
Standalone 3-month quarter versus year-to-date figures
The same period of the previous year
Net income attributable to the parent versus total net income
Whether units are won, thousand won or million won

US companies: 10-K and 10-Q

SEC EDGAR Search there by company name or ticker.

10-K: Item 8. Financial Statements and Supplementary Data
10-Q: Part I, Item 1. Financial Statements
MD&A: Management's explanation of changes in revenue, margins and costs
Notes to Financial Statements: Revenue recognition, business segments, taxes, debt, EPS and related notes

Key terminology includes:

Korean accounting term	Common US filing term
Income statement	Statements of Operations / Statements of Income
Revenue	Revenue / Net sales
Cost of revenue	Cost of revenue / Cost of sales
Gross profit	Gross profit
Operating income	Operating income
Income before tax	Income before income taxes
Net income for the period	Net income
Earnings per share	Earnings per share

US 10-Q filings may also present Three months ended and Nine months ended alongside each other as standalone quarterly and cumulative figures, so check the periods.

7. Key takeaways

Revenue shows sales scale, gross profit shows product-level profitability, and operating income shows core business profitability.
Net income includes non-operating factors such as interest, foreign exchange, asset disposals, impairments and taxes.
If operating income grows faster than revenue, operating leverage or an improved product mix may be contributing.
For PER, use normalized net income attributable to the parent's shareholders where possible.
Identical net income can differ in quality depending on whether it comes from recurring operating earnings or one-off disposal gains.
The income statement shows profit, but does not capture every actual change in cash.

8. Three review questions

Question 1

Calculate gross profit, operating income, gross margin and operating margin for a company with revenue of 2,000, cost of revenue of 1,200 and SG&A of 500 (units: KRW 100 million).

Question 2

A company's revenue increased 15% year over year, but operating income declined 10%. Give three causes to investigate first.

Question 3

Companies E and F both report net income of 200. E has operating income of 260, while F has operating income of 50 and a real-estate disposal gain of 220 (units: KRW 100 million). Which company's net income is relatively more repeatable?

Answers and explanations

Answer 1

\[\text{Gross profit}=2,000-1,200=800\text{ (KRW 100m)}\]

\[\text{Operating income}=800-500=300\text{ (KRW 100m)}\]

\[\text{Gross margin}=800\div2,000=40\%\]

\[\text{Operating margin}=300\div2,000=15\%\]

Answer 2

Typical checks include:

Higher cost of revenue, such as raw materials or employee costs
A larger share of low-margin products or lower selling prices
Higher SG&A, such as R&D, advertising or employee costs

Also check new-factory start-up costs, low utilization and inventory write-downs.

Answer 3

Company E has relatively more repeatable net income. F's net income includes a large real-estate disposal gain outside its core business. When valuing F, calculate normalized net income excluding that gain.

Next lesson — Day 4:
“The Balance Sheet as a Financial Health Check: Assets, Liabilities, Equity and Net Debt”