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The quarterly reports and financial statements are early indicators that show the quarterly progress of the business towards its projected annual target. As per SEBI (Securities and Exchange Board of India) guidelines, it is mandatory for every listed company to publish quarterly reports of the company to the public to safeguard the interests of the investors.
Thus, quarterly reports help investors assess the performance of the company and make informed decisions.
However, there are multiple aspects to understanding the quarterly reports in-depth other than Net profits alone and as an investor, you need a clear financial analysis guide.
Here are a few important things to look at while understanding quarterly reports and a step by step guide for financial statements.
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- Gross Sales
- Net Sales
- Operating Income
- Operating Profit
- Interest cost
- Net Profit
- EPS (Earnings per share)
This is the “top-line” or the turnover of the company which is the measure of the total revenue or sales or earnings. A consistent rise in the top line is an indicator of growing demand and good business health. Ad hoc sales of fixed assets or one fly-by-night operator demand do not give consistency in the top line, only healthy sincere customers do.
Please note: Gross Sales of a particular year cannot be considered on its own. The gross sales need to be considered for a period to find business health.
Net Sales = Gross Sales – Discounts/Returns/Allowances
This is a better measure to understand real business health than Gross Sales. But to calculate the same, one needs all the details of sales discounts, returns and the allowances offered, etc.
The income of a company comprises both operating and non-operating income. Operating income is from selling the company’s products or services. It is the measure of the profit generated from operating the business after deduction of salaries, depreciation of goods and another fixed cost. It is a measure of the profitability of the business.
On the other hand, non-operating income is other-than-business income and includes revenues made from dividends, rental income, interest, etc.
A consistent decrease in operating income could mean a declining market share or reduced demand for the company’s product or services.
Operating Profit = Net Sales – Operating Expenses
Wherein operating expenses is the cost of running the business-like
- Utility bills like electricity, rent, etc.
- Office expenses like stationery, license cost, etc.
- Cost for research and development
- Legal and bank charges, etc.
And other fixed and variable costs that form a part of the operating expenses need to be deducted from net sales to arrive at the Operating Profit of the business.
This figure is called the EBITDA, i.e. Operating Profit or Earnings Before Interest, Depreciation, Tax and Amortisation.
Higher the Operating Profit, healthier is the business. The Operating Profitability shows the ongoing business conditions as well as the efficiency of the management. Operating profit is one of the important factors considered in a financial analysis guide.
Margins help determine the financial safety of a company. The growth in a profit should not be at the cost of margins. Margin is the business’ “safety net”.
If there is a decrease in the EBIT margin of the company, then it is an indication that the company is taking a hit on profitability to increase its revenues or due to higher operational costs and thereby there is a decrease in the margin
Interest is the amount of money paid for the loans, especially in operating the business. Thus, an increase in the interest cost means an increase in the debt of the company. However, debt is healthy for the financial wellness of the business as long as there is a proper deployment of the same with steady growth in sales and profitability. Otherwise, the rising interest would eat up the business margins.
If the increased debt is not accompanied by an increase in sales and profits, then it will lower the profitability for the investors.
The term Net Profit is referred to as the “Bottomline”. It shows the company’s net profit or loss for that period.
Net Profit = Operating Profit – Tax – Loan Repayment
It is of most relevance to understanding the financial health of the company and is often one of the most sought after factors in financial statements. Higher the net profit, higher is the company’s profitability.
EPS (Earnings per share)
EPS is calculated by dividing net profit by a total number of outstanding shares. The EPS value is used to calculate the P/E ratio of a share, which is actually the amount of money paid for 1 share vis-à-vis the amount of money earned by the company for that share.
It is another very good indicator of the company’s financial status and is widely used and referred to in the industry. Thus, calculating the EPS correctly is of extreme importance.
Earnings per share (EPS)= Net Profit / Total number of shares traded
Pro Tip: For an investor, it is important to see how the EPS is improving. A higher EPS indicates better performance of the company which results in more earnings for the shareholders.
This was just a step by step guide for financial statements and to understanding various concepts. Quarterly reports are only indicative of a company’s performance and should not be a standalone criterion. There are other qualitative measures that also need to be factored in while making buy and sell decisions.