Part 6 · Reading disclosures beyond the numbers · Lesson 28
Finding how a company makes money in the Business Overview
If the financial statement numbers tell you "how much," the Business Overview tells you "how." Find out what it sells, what it makes it with, and how hard its factories are running.
QToday's question
There's a bakery with KRW 12 billion in sales. Is it because the bread sells well, or because the cakes sell well? If flour prices rise, who gets hurt more?
Financial statements show only totals. Which products those totals came from, which raw materials were used, and which factories produced them are written in Section II, "Business Overview," of the annual report. In this lesson we'll draw how a company makes money as a one-page map.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 5 we skimmed the 12-section table of contents of the annual report and saw that Section II is a "read first" zone. In Lesson 13 we learned how revenue, cost of goods sold and raw material prices shake margins, and in Lesson 14 the operating leverage of companies with big fixed costs. Today we go looking for the "why" behind those numbers.
- STEP 1 · Basic conceptsA map of Section II's seven boxes
Explain what each of the 7 sub-items of the tells you.
- STEP 2 · Understanding the principleReading revenue mix, raw materials and utilization
Explain how the , , , and connect to profit.
- STEP 3 · Putting it into practiceDrawing the structure from a real annual report
You'll be able to find II-2 and II-3 on DART and sum up a company's money-making structure with five questions.
STEP 1A map of Section II's seven boxes
If financial statements are a report card, the Business Overview is the student's school record. It tells what the student is good at and what they spend their time on.
So far we've read Robin Bakery's numbers with the balance sheet, income statement and cash flow statement: sales of KRW 12 billion, operating profit of KRW 1.5 billion, operating cash flow of KRW 1.8 billion. But those numbers alone make it hard to know "why they came out that way." Whether the KRW 12 billion of sales came from bread or from cake, how much it hurts when flour prices rise, and how many hours the ovens are running aren't in the tables.
This story is told in the annual report's . As you saw in Lesson 5, all listed companies write it in the same format, so the sub-items are the same seven slots every time. Knowing just the slot names lets you find the information you want right away.
| Box | What is written there | Question it mainly answers |
|---|---|---|
| 1. Business overview | A one- or two-page summary of what the company does | What kind of company is this? |
| 2. Major products and services | Sales and share by product and segment, price changes of major products | What is what percent of sales? |
| 3. Raw materials and production facilities | Key raw materials, suppliers and price changes; production capacity, output and utilization; capital investment | What shakes costs? How hard is it running? |
| 4. Sales and order status | Sales by product and region, sales channels, order backlog (order-based industries) | Who does it sell to and how? How much work is left? |
| 5. Risk management and derivatives | FX, interest rate and commodity risks and responses | Which winds is it weak against? |
| 6. Major contracts and R&D activities | Important contracts, R&D spending and results | What is it doing for the future? |
| 7. Other reference matters | Market conditions, competition, market share, regulation and more | Where does it stand in the market? |
Box names: confirmed from the DART annual report (general corporation) table-of-contents tree (same source as Lesson 5; rechecked against the Samsung Electronics 2025.03.11 annual report's table of contents on 2026-10-08). The description of each box is a Robin Invest summary.
You don't need to read all seven boxes. At first, just reading three boxes, No. 2 (what it sells), No. 3 (what it makes it with and how hard it runs) and No. 4 (who it sells to and how much work is left), shows the skeleton of the company. No. 1 is an introduction, so skim it, and Nos. 5–7 are boxes to look up when a question comes up.
Quick checkYou want to know "what percent of this company's sales is semiconductors?" Which box number in Section II should you open first?
STEP 2Reading revenue mix, raw materials and utilization
There are four numbers you must pull out of Section II: what it sells, what it makes it with, how hard it runs, and how much is left to come.
1. Revenue mix: what is what percent
The is a company's identity. The fictional Robin Bakery's KRW 12 billion in sales consists of bread KRW 7.2 billion (60%), cakes KRW 3.6 billion (30%), and coffee KRW 1.2 billion (10%). Even among 'bakeries', a large share of cakes concentrates sales around year-end and anniversaries (seasonality, Lesson 17), while a large share of coffee makes the business more sensitive to coffee bean prices and exchange rates. The more concentrated the mix is in one product, the more that product's fate is the company's fate.
2. Key raw materials: what shakes costs
In Lesson 13 we saw that of Robin Bakery's cost of goods sold of KRW 7.2 billion, raw materials are KRW 4.3 billion. II-3 states what those raw materials specifically are, who they are bought from and how prices have changed. For Robin Bakery (hypothetical), they would split roughly into flour KRW 1.5 billion, butter and dairy KRW 1.2 billion, sugar, fruit and others KRW 900 million, coffee beans KRW 400 million and packaging KRW 300 million. Flour and butter make up over 60% of raw materials, so when global wheat prices and dairy prices rise, margins are the first to be shaken.
3. Capacity and utilization: how hard it runs
= actual output ÷ production capacity. If an oven can run 10 hours a day but runs only 7.5 hours, utilization is 75%. When utilization is low, higher sales just mean running the oven more, so fixed costs do not rise and the operating leverage from Lesson 14 works strongly. Conversely, once utilization exceeds 90%, selling more requires new ovens and stores, so capital expenditure (FCF, Lesson 20) grows.
Robin Bakery's money-making map (hypothetical)
Tap a donut slice or the buttons above. The revenue shares (bread KRW 7.2 billion, cake 3.6 billion, coffee 1.2 billion) are hypothetical figures shared across the course, and the raw material mix, price changes, utilization and sales channels are hypothetical examples made for this lesson.
4. Order backlog: sales still to come
Companies such as shipbuilders, defense contractors, and builders, which take orders first and build over several years, report their in II-4. It is the size of work already contracted but not yet recognized as sales. If the backlog is 3 times annual sales, three years of work is stacked up, so future sales are relatively visible. Robin Bakery has no backlog, but the cake reservation deposits from Lesson 8 (KRW 300 million in advances received) play a similar role. The more money collected in advance, the more next quarter's sales are effectively booked.
Common misconceptions
- "The business with the largest share of sales also earns the most profit?"
- No. The share of sales and the share of profit are often different. Operating profit by segment must be checked separately in "Segment reporting" in the notes to the Section III consolidated financial statements. We'll open the notes in the next lesson.
- "The higher the utilization rate, the better, no matter what?"
- It's good for profitability right now, but near 100% it also means there is no room left to sell more and big capital expenditure will soon be needed. Look at the capital investment plan together with utilization.
- "The Business Overview is promotional writing by the company, so it can't be trusted?"
- The descriptive sentences carry the company's point of view, but numbers such as sales, share, production capacity and order backlog are disclosure information entered according to a set format. Read the sentences critically and the numbers carefully.
Quick checkA factory with a capacity of 1 million units a year made 920,000 units this year. If next year's orders rise 20%, what will be needed?
STEP 3Drawing the structure from a real annual report
Now let's open Section II of a real annual report and draw the same map. This is practice in reading structure, not a stock recommendation.
Find it yourself on DART
- 1Search for the company name on DART and open Periodic disclosure → Annual report (Lesson 3).
- 2In the left table of contents, tap II. Business Overview → 2. Major products and services. The table at the top shows sales and share by segment and product.
- 3In "Price changes of major products" in the same box, see how the prices of the goods it sells have changed.
- 4In 3. Raw materials and production facilities, look at raw material suppliers and prices and the production capacity and utilization table.
A real annual report, II-2 sales of major products (redrawn from the screen)
2A. Sales of major products (Unit: KRW 100 million, %)
| Segment | Main products | Revenue | Share |
|---|---|---|---|
| DX division | TVs, monitors, refrigerators, washing machines, air conditioners, smartphones, etc. | 1,748,877 | 58.1% |
| DS division | DRAM, NAND Flash, mobile AP, etc. | 1,110,660 | 36.9% |
| SDC | OLED panels for smartphones, etc. | 291,578 | 9.7% |
| Harman | Digital cockpits, car audio, etc. | 142,749 | 4.8% |
| Other | Intercompany eliminations between segments, etc. | △285,155 | △9.5% |
| Total | 3,008,709 | 100.0% |
3B. Price changes of major products — average TV selling price down about 2%, smartphones up about 2%, memory up about 63%, OLED panels for smartphones down about 29% (year over year).
Source: DART Samsung Electronics annual report filed 2025.03.11 (rcpNo 20250311001085), II-2 original text, checked 2026-10-08. This is an example to show the structure and not an investment recommendation. Segment sales include intercompany transactions between segments, so they are subtracted under "Other" to make the total match (the same principle as intercompany elimination in Lesson 11).
This one table shows a lot. More than half of sales come from finished products (DX), but just below it is a sentence saying the average selling price of memory rose about 63% that same year. It is a clue to where the gross margin difference between 2023 and 2024 seen in Lesson 13 (30.3% → 38.0%) came from. The "why" behind the numbers is in the Section II sentences like this. However, how much each segment earned (operating profit) isn't in this table and must be checked in "Segment reporting" in the Section III notes.
Open II-3 and the raw material table appears. The same report lists mobile AP solutions (16.1% of purchases), display panels (11.2%) and camera modules (8.2%) as the main raw materials of the DX division, and below that shows the capacity, output and utilization table for three years. If raw material prices rise and the company can't raise product prices, margins shrink (Lesson 13), and if utilization falls, the fixed-cost burden grows (Lesson 14). The purpose of reading Section II is ultimately to anticipate in advance which way the income statement numbers will move.
Five questions to answer after reading
Tap a question to open a model answer for Robin Bakery (hypothetical) and where to look. When you study a real company, jot these five lines down as a note too.
How to use it in investing
| What you saw in Section II | How to usually read it | What to check next |
|---|---|---|
| One product is 70% or more of sales | That product's business conditions drive earnings | That product's price cycle (Economics Lesson 3) |
| A key raw material price spikes | If product prices can't be raised, margins fall | Price change section, gross margin in Lesson 13 |
| Utilization falls | Fixed-cost burden can cut profit even more | Operating leverage in Lesson 14 |
| Utilization of 90% or more + expansion plan | Securing room to grow, but an investment burden for a while | FCF in Lesson 20, investment plan in Section IV |
| Order backlog as a multiple of sales | Future sales are relatively visible | Order unit prices and cost increase risk |
It isn't always so. The shares and utilization in Section II are based on "last year," so they may already be priced in (Economics Lesson 20, priced in), and the important numbers differ by industry. Putting the Section II of companies in the same industry side by side makes differences much easier to see (Lesson 26).
Quick checkIn the real table above, what percent of the total is DS division sales, and how did memory prices change that year?
✓What we learned today
- II. Business Overview of the annual report is made up of seven boxes, from 1. Business overview to 7. Other reference matters, and every listed company writes them in the same order.
- In II-2 Major products and services you see the revenue mix (what is what percent), in II-3 Raw materials and production facilities the roots of cost and utilization, and in II-4 Sales and order status the sales still to come.
- Robin Bakery (hypothetical) is bread 60%, cake 30%, coffee 10%, and with flour and butter at the center of costs, it is sensitive to grain prices.
- When utilization is low and sales grow, fixed costs stay the same, so profit rises a lot (operating leverage in Lesson 14); when utilization is already high, expansion investment becomes necessary.
- After reading the Business Overview, you should be able to answer five questions: "what does it sell, who buys, what shakes costs, how hard is it running, and how much is left to come?"
If the Business Overview showed the company's outward appearance, the next lesson opens the long "notes" attached behind the financial statements. It is where payment guarantees and lawsuits that aren't in the main body can be hiding.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. In which box of Section II of the annual report is the table of sales and share by product and segment?
The first table in II-2 "Major products and services" is sales and share by segment and product. More finely divided sales are in II-4.
Q2. Flour and butter/dairy make up over 60% of Robin Bakery's (hypothetical) raw materials. Which news is it most sensitive to?
The biggest chunk of raw materials is flour. If wheat prices rise and the bakery can't raise bread prices, gross margin falls (Lesson 13).
Q3. Sales rose 10% at a factory running at 70% utilization. What generally happens to operating profit?
If you make more with spare capacity, fixed costs don't rise, so much of the added sales is left as profit. This is the operating leverage from Lesson 14.
Q4. Which best describes a shipbuilder whose order backlog is 3x annual sales?
Order backlog is work that is under contract but not yet recognized as sales. It means future sales are relatively visible, but it doesn't promise a stock price.
Q5. Where do you mainly check "how much each segment earned (operating profit)"?
II-2 has sales and shares, and profit by segment is in "Segment reporting" in the notes. We'll open the notes in the next lesson.
NextTerms · Next lesson · Related tools
Chapter II of the annual report. It holds how the company makes money: the business summary, main products, raw materials, sales and order status, and more.
Revenue mixRevenue mixThe shares showing which products, segments and regions the total sales come from. It appears as a table in annual report II-2 Major products and services.
Key raw materialsKey raw materialsThe core materials that go into making products, with their suppliers and prices. It is written in annual report II-3 Raw materials and production facilities, and when prices rise, the gross margin gets shaken.
Utilization rateUtilization rateThe ratio of actual output to production capacity. When utilization is low, added sales leave a lot of profit; when it is too high, expansion investment becomes necessary.
Order backlogOrder backlogThe amount of orders already under contract but not yet recognized as sales. It is used to gauge future sales in industries with long build times, such as shipbuilding, defense and construction.
Segment reportingSegment reportingA note to the financial statements that shows sales, operating profit and assets by business segment. It tells you which business actually makes the money.
RevenueRevenueThe total amount a company earns by selling goods and services. It is the amount before deducting costs.
Cost of goods soldCost of goods soldThe costs directly incurred to make the products that were sold. They include raw material costs, manufacturing labor and equipment depreciation. The cost of unsold products stays in inventories and becomes cost of goods sold when sold.
Operating leverageOperating leverageThe phenomenon in which, because of fixed costs, operating profit changes several times more than sales do. It is amplified by roughly (sales − variable costs) ÷ operating profit. It is larger in industries with heavy equipment.
Put what you learned to use right away
Reading Financial Statements Lesson 5 · A map of the annual report→Theme Map→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.