Revenue or Total Income to Profit conversion

One of the most useful tools for analysing the financial performance of a company is the Revenue or Interest Income to Profit waterfall conversion. This is a method that shows how a company makes money by graphically summarising the financial statements. It helps us to understand how a company makes money from its core business activities and how much it spends on various expenses.

TradingView solution makes it possible to use this method for two types of companies: corporate entities and financial companies. Corporate entities are businesses that sell goods or services to customers and generate revenue from sales. Financial companies are businesses that provide financial services such as lending, investing, or insurance and generate interest income from their assets.

For corporate entities, along the way we get indicators such as the Gross Profit, Operating Income, Net Income (and margins). This indicator helps investors easily understand how effective the business is currently, how much the company makes for each dollar of revenue or interest income, what it spends the most on, and where the most potential for business improvement are.

To calculate the Net Profit of a financial company like a bank, we can use a similar method as for corporate entities, but with some differences. Financial companies generate the Interest Income from their assets such as loans, securities, etc. and pay the Interest Expense on their liabilities such as deposits, borrowings, etc.. We start with the sum of Interest Income and Non-Interest Income (fees, commissions, trading, etc. ) then deduct the following items: Interest Expense and Loan Provisions (the amount of money that the company sets aside to cover potential losses from bad loans or defaults), Non-Interest Expense, Unusual Expense and Net Taxation. The outcome is the Net Income of the financial company. Along the way we can also arrive at the bank-specific intermediate stages such as the Net Interest Income After Loan Loss Provision, Bank Operating Income, and Pretax Income. This method helps us to examine the step-by-step process from the Interest Income to Net Profit and to pinpoint the main factors of bank’s non-treasury profitability.

As you can see from the Waterfall chart, each component of the income statement is shown as a bar that either adds to or subtracts from the previous bar. The final bar shows the net income or net profit of the company. This way, we can easily see how each component affects the profitability of the company and compare the margins at each stage.