Financial analysis for beginners – Profit and Loss statements
This is the most important analysis that any potential investor needs to make before making an investment decision. On a quantitative parameter, this is the one of the few objective documents available.
I personally like to believe the story that the financials of the company are telling. There are no opinions, judgement or any other personal bias in these numbers.
I hope that you know that this is only part of the steps. The preceding steps of this process are:
Industry research : Online resources for Industry research
Consumer research : Online resources for Consumer research
What it is not: At the onset, I will like to clarify that this is not a post for the financial wizards or those with considerable investment experience based on their own process.
Target audience: The target audience for this article are the following :
- Salaried employees – who are stressed about investments because job and family does not leave any time to research stock investments,
- Students : those who want to or are about to enter the stock markets, so that they don’t get enamored by “TV pundits, investment gurus, research reports or whatsapp” groups giving stock ideas,
- Any one interested to learn : Because of our society and education structure, finance is made out to be the rocket science that only few professional can decode. Well, I am neither a CA or Tax lawyer or a rocket scientist, but can manage to read the financial statements and make some sense out of them.
- Females : They have great careers, but depend on family or friends to make their investment decision. This post is an endeavor to involve them in active management of their finances and future.
Los geht’s (Let’s go):
What is a profit and loss statement :
A profit and loss statement in the simplest form is the report card of the company for a period of time (quarter, 6 months or an year). It provides details of the major revenue and costs items, that the company goes through in the process of normal business.
I am not taking an in-depth Profit and Loss statement (which you can find in the annual reports). For the purpose of this article, I will focus on a simple and basic P&L format.
Source : Alembic Pharma P&L
This is an annual consolidated P&L for a company – Alembic Pharmaceuticals, I had made investment in (I still hold this investment. This note is not a stock purchase recommendation or stock idea).
Source : Alembic Pharma P&L
- Revenue from Operations (Gross): this is the total revenue earned by Alembic in each of the completed Financial Year. Gross revenue means that the revenues includes the taxes, customs and/or other levies, which Alembic has to pay to the governments. This is the sum total of all their business revenue.
Personal comparison: If your annual salary is Rs 36,00,000 (Gross), this is similar to the Alembic’s revenues of Rs 3,130 crores Alembic earned for financial year ending March, 2017.
- Excise/Service Tax/ Other levies: this are the charges which Alembic has collected from its clients or customers on behalf of the government. Since this money belongs to the government, it cannot be included as Alembic’s revenue calculation. Hence, it needs to be reduced from their annual revenues.
Personal comparison: Although your annual salary is Rs 36,00,000 Gross, you pay income tax of Rs 9,00,000 (assumed). This figure is 0 for Alembic in 2017, was Rs 36 crores in 2016.
- Revenue from operations (Net) : this is the difference of the above 2 items. This is the real business revenue that Alembic earns for the year (2017).
Personal example: Assuming the above tax amount, your annual net income is Rs 27,00,000 (Rs 36,00,000 – 9,00,000). For FY 2016, this is similar to Alembic’s revenue of Rs 3,061 crores (Rs 3,097 cr – Rs 36 cr).
- Other operating revenues: these are the revenues for which the company does not plan for, but are generated as a by-product of their operations, Simplest example : by-products of crude oil processing is used as a raw material to manufacture household detergents.
Personal example: If your wife or girlfriend is part of a kitty party, in which Rs 5,000 savings generate Rs 6,000 for your household. This amount was Rs 3.6 cr for Alembic in 2017.
- Other incomes: these are the incomes earned by Alembic from various investments that they might have made – from financial instruments or rental income from the commercial or residential buildings that Alembic might own.
Personal example: If you have invested your money in a FD and it earns Rs 5,000 per annum for you. This is similar to Rs 2.47 cr that Alembic earned in 2017.
Take a break now 🙂
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