Interpreting a Company’s

Financial Statement

Understanding

Financial Statements

Understanding Financial statements

• A company’s report card is its ‘Statement of accounts’ and as an investor, it is important for you to go through this report in order to know how well the company is placed financially, before you put your money in its stock

• The profit & loss (P&L) account and the balance sheet are vital aspects that an investor needs to focus on before putting his hard earned money in a company

What is a P&L account?

A look at the ‘P&L Account’

2010 2009

Income Sales 120 90Less: Excise duty 15 12Net Sales 105 78

Other Income 25 22Net Income 130 100ExpenditureRaw materials 55 50Other Expenses 23 20VRS compensation

20-

-

Interest12

2 12

Depreciation 10 10Total Expenses 120 92Profit before Tax (PBT) 10 8

Tax 7 5Profit after Tax (PAT) 3 3

Snapshot of

a P&L Account

Understanding P&L account

• Other income means income which is not directly related with the business. It can be income from investments or profit from sale of assets. The company may not necessarily earn ‘other income’ every year

• Interest paid is usually that on loans taken by the company

• Depreciation means loss due to wear and tear of company machinery and other similar fixed assets

Understanding P&L Account

• It’s important to know whether the sales figures have improved due to increase in volume of sales or due to increase in prices of products

• Profits should always be compared with that of the preceding period

• Expenses like VRS compensation don’t occur every year and they bring down the wage bill for the next year

Understanding P&L Account

• If ‘other income’ of the company contributes heavily to the profits then it’s not a healthy sign

• The head ‘Other expenses’ should be excluded while comparing profits as most of these expenses don’t occur regularly

• PBT is important because taxes constantly change and taking it out gives an investor a good idea of a company's profits from year to year 

What is a Balance sheet ?

A look at the ‘balance sheet’

(Rs lakh) 2010 2009

Sources of FundsShareholder’s fundsShare capital 100 100Reserves & Surplus 500 350Loan fundsSecured loans 100 150Unsecured loans 25 35Application of funds

Gross Block 500 400Less: Depreciation 35 25Net Block 465 375Add: Capital Work in Progress 125 75

Current assets, loans & advances

Inventories 225 125Sundry debtors 145 100Cash & bank balances 350 240Loans & advances 135 125Less: Current liabilities & Provisions

Current liabilities 495 130Provisions 225 275Net current assets 135 185Total 725 635

Snapshot of a

Balance Sheet

Understanding Balance Sheet

• Application of funds tells you how the company has utilized the money

• The amount under ‘gross block’ is assets (plant, machinery, land, etc.) purchased/owned by the company

• Current assets include stocks of goods that a company will convert into finished product, debtors, etc

Understanding Balance Sheet

• Current liabilities mean those debts which need to be repaid within a year

• Capital work in progress is goods which are in the process of being converted into finished products

• Under shareholders' funds, the reserves and surplus component has increased. This indicates accumulation of profits

Understanding Balance Sheet

• Loans have come down which means the company is repaying its loans

• Gross block has increased which implies the company is increasing its assets’ base

• Inventories (stocks) have risen which could mean that either the company has increased its scale of operations due to increase in sales or the goods have piled due to lower sales

Thank You!

Questions? Feedback? Click on any of these -

Twitter FacebookWebsite

Read More

• Registered office: Kotak Securities Limited, 1st Floor, Bakhtawar, 229, Nariman Point, Mumbai - 400021. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230/INE 011207251, OTC INB 200808136, MCXSX INE 260808130.

• Disclaimer: Investments in securities are subject to market risks, please read the SEBI prescribed Combined RDD prior to investing.

• * Awarded Best Brokerage Firm in India by AsiaMoney in 2006, 2007, 2008 and 2009