Lesson 1 of the Reading Financial Statements course

The Three Statements, and Your First Real Read

Every company tells you three different stories about its money. Today you'll meet all three, and use real numbers from Safaricom to answer one honest question: is this company actually making money?

Why three statements, not one?

You might expect a company to publish one summary: "here's how much money we have." Instead, every public company publishes three separate statements, because money moves through a business in three fundamentally different ways, and each statement is built to answer a different question:

Income Statement (also called the Statement of Profit or Loss) — "Did the business make money this year?" It covers a period of time (e.g. the 12 months to 31 March 2024).
Balance Sheet (also called the Statement of Financial Position) — "What does the business own, and what does it owe, right now?" It's a snapshot at a single date, like a photo rather than a video.
Cash Flow Statement — "Did actual cash move in and out of the business this year?" This exists because a company can report a profit on paper while barely any real cash changed hands — you'll see why that matters in a later lesson.

Why this separation matters

A company can look profitable on the income statement while quietly running out of cash, or look cash-rich while quietly building up debt. You only see the full truth by reading all three together. Lesson 1 focuses on statement #1 — the income statement — because it's the most intuitive place to start: it answers the question most people ask first, "is this company profitable?"

Meet the company: Safaricom PLC

Safaricom is Kenya's largest telecom operator (M-PESA, voice, data) and one of the most-traded stocks on the Nairobi Securities Exchange. Below is its real, audited Statement of Profit or Loss for the year ended 31 March 2024, taken directly from its published financial statements — simplified to the lines you need for this lesson.

Safaricom PLC — Group Statement of Profit or Loss (extract), year ended 31 March
KShs millions	FY2024	FY2023
Total revenue	349,447.2	310,904.8
Direct costs	(97,046.9)	(92,232.1)
Other operating expenses	(83,300.3)	(74,085.0)
Earnings before interest, tax, depreciation & amortisation (EBITDA)	163,292.6	139,862.4
Depreciation & amortisation (total)	(82,948.0)	(54,865.0)
Operating profit	80,344.8	84,997.4
Net finance costs, tax adjustments & other items	4,342.6	3,347.8
Profit before income tax	84,687.4	88,345.2
Income tax expense	(42,029.0)	(35,862.4)
Profit for the year	42,658.4	52,482.8

Source: Safaricom PLC Annual Report and Financial Statements 2024, p.177 (figures simplified/grouped for this lesson; audited, currency KShs millions).

How to actually read this table

Read it top to bottom, like a waterfall. Each line subtracts a bit more from revenue:

Revenue — everything customers paid Safaricom. This is the top of the waterfall: KShs 349.4 billion in FY2024.
Subtract direct costs and operating expenses — the cost of running the network, staff, marketing — and you get EBITDA, a rough measure of how profitable the core business is before accounting for equipment wear-and-tear or financing.
Subtract depreciation & amortisation — the accounting cost of equipment (towers, fibre, licences) wearing out or being used up over time — and you get operating profit.
Adjust for financing costs/income and other one-off items, and you get profit before tax.
Subtract tax, and what's left is profit for the year — the number everyone means when they say "the bottom line."

Your first real insight

Look closely: revenue grew from KShs 310.9bn to KShs 349.4bn (+12.4%) — but profit for the year fell from KShs 52.5bn to KShs 42.7bn (a drop of about 18.7%). Revenue going up and profit going down at the same time is one of the first things a careful reader checks for. It means costs grew faster than revenue somewhere in the waterfall.

In Safaricom's case, most of that gap came from a jump in depreciation & amortisation (KShs 54.9bn → KShs 82.9bn) — largely driven by their continued heavy investment in network infrastructure, including the Ethiopia expansion. That's not necessarily bad news — it can mean a company is investing for future growth — but it's exactly the kind of thing you'd want to investigate further, not just accept at face value. That's the whole point of this course: don't just look at "profit," look at why profit moved.

Check your understanding

Which line in Safaricom's income statement represents "everything customers paid Safaricom" before any costs are subtracted?

Safaricom's revenue rose 12.4% but profit for the year fell ~18.7%. What does that combination tell a careful reader?

What's next

Next lesson, we'll look at the Balance Sheet — the snapshot of what Safaricom owns and owes — and connect it back to this income statement, so you start seeing the three statements as one story instead of three separate documents.

Go deeper

Primary source for this lesson's numbers: Safaricom PLC Annual Report and Financial Statements 2024. For a broader beginner-friendly overview of all three statements before the next lesson, read Harvard Business School Online's "How to Read Financial Statements: A Beginner's Guide".

Something unclear, or want to dig into a line item we skipped (like "what exactly is amortisation")? Ask your teacher — that's what these sessions are for.

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