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4.1 Summary of Financial Statements

You can look at the financial statement from two perspectives. 

1. from the point of view of the creator
2. and from the user’s point of view 

The person preparing the financial statements usually comes from an accounting background. Ledger Entry i.e. accounts entry, matching bills and receipts, matching the arrival and movement of money i.e. Inflow-Outflow, all these are his daily work. Its objective is to prepare a transparent financial statement, which can accurately reflect the financial condition of the company. The skills needed to prepare such financial statements are acquired during the training of a chartered accountant. 

On the other hand, the person using the financial statement just wants to understand that statement. He just has to use it. It is not necessary for him to know and understand every minute detail about the journal entry or audit. He only means that he can make his decision about the company’s stock after reading the financial statement. 

People generally have a misconception that a fundamental analyst should have a good understanding of how financial statements are prepared. It is a good thing to have this understanding, but it is necessary – it is not so. To become a fundamental analyst, you only need to be able to use financial statements, not be able to prepare them. 

In the financial statement, the company gives three important pieces of information: 

1. Profit and Loss Account i.e. Profit and Loss Statement
2. Balance Sheet
3. Cash flow statement

In the next few lessons, we will learn to use all three of them. 

4.2 Profit and Loss Statement (P&L statement)

 The profit and loss statement or P&L statement is also called the income statement, statement of operations, or statement of earnings. The Profit and Loss Statement shows the transactions that took place during a particular period. It contains information about the following things-

1. Company’s earnings over a given period of time (annually or quarterly)
2. expenses incurred to earn income 
3. Tax & Depreciation
4. Earning per share number ie Earning per share number

My experience says that the best way to understand a financial statement is to look at the actual statement and understand the information in it. Shown here is the P&L statement of Amara Raja Batteries Limited (ARBL). Understand each line item of it. 

4.3 Company’s Top Line (Revenue)

You must have heard experts talking about the company’s top line many times. In fact, they are talking about the revenue of the P&L statement. The first thing the company gives in its P&L is the revenue or income number.

Before we start understanding this, let us know some of the things written in the header of the P&L statement. 

The header clearly states that…

1. The P&L statement is for the year ended 31 March 2014. This means it is an annual statement, not a quarterly one. Also, if it is a statement as on 31 March 2014, then it is a statement for the financial year 2013-14 or FY14. 
2. All the numbers given here are in millions of rupees. Note – 1 million is equal to 10 lakh rupees. It completely depends on the company in which unit it would like to give the numbers given in the statement. 
3. All keynotes are detailed here, and any associated notes (also called schedules) are given in the notes section. There is a special note number for each note. 
4. Traditionally, companies give the current year’s number in the left column and the previous year’s number in the right column of the financial statement. In this example, there is a number for FY14 and a number for FY13. 

The first line item on the revenue side is the Sale of products. 

Since here we are discussing a battery manufacturing company, so here sales of the product mean the total number of batteries sold by the company in FY14. The total figure of sale is Rs.3804,12,70,000, ie Rs.3804 crores. The company sold batteries worth Rs 3294 crore in the last year i.e. FY13. 

I am deliberately giving figures in crores here because I think it will be easier to understand. 

The next line item is excise duty. The company will pay this Rs 400 crore to the government. This will be taken out of the income of the company. 

The figure obtained after removing the excise duty is called the Net Sales of the company. ARBL’s Net Sales in FY14 is Rs.3403 Crore as compared to Rs.2943 Crore in FY13.

Apart from the sale of products, the company also generates income from the sale of services. Here it can mean annual maintenance of the battery. The company earned Rs 30.9 crore in FY14 from the sale of services. 

The company has also earned Rs 2.1 crore from Other Operating Revenue ie other working income. This income has come from the sale of certain goods and services that are related to the company’s core business. 

Finally, Total Operating Revenue (Total Operating Revenue) i.e. total income is shown as the Sale of Product + Sale of Service + Other Operating Revenue. It is Rs.3436 crore in FY14 while in FY13 this figure was Rs.2959 crore. A note has also been given here which is number 17. It is related to Net Revenue from operations ie net income from operations. We will see this properly later. 

You will recall that in the previous chapter, we talked about the notes and schedules of the financial statements. 

The picture below is showing the details of this Note 17. 

It is clear that in this note, detailed information has been given about the income from operations so that we get to know its different parts. As you can see in section A the sale of products ie the sale of goods is divided into parts. 

1. In FY14, Rs 3523 crore was earned from the sale of finished goods, while in FY13 this figure was Rs 3036 crore.
2. The last financial year’s finished goods, which are called stock in trade in English, were sold in the current year FY14 to Rs 208 crores, while in FY13 it was Rs 149 crores. 
3. The company earned Rs 71 crore in FY14 by selling UPS. In FY13, this earning was 109 crores. 
4. The company earned Rs 3403 crore after paying excise duty from the sale of its products, which matches the figures given in the P&L of the company. 
5. Similarly, you can also see the parts of the earnings from the services. This earned an income of Rs 30.9 crores, which is in line with the P&L figures. 
6. In the note, the company has said that it has earned Rs 2.1 crore from the “Sale of Process Scrap”. Note here that the sale of process scrap is part of the core business of the company, so it is included under Other Operating Revenue. 
7. By adding all types of revenue ie income, net revenue ie net income is known, like 3403 crores + 30.9 crores + 2.1 crores = Rs 3436 crores
8. You will see the same in the FY13 statement as well. 

If you pay attention, you will see that ARBL has also shown other income of Rs 45.5 crore in addition to net revenue on the P&L statement. Note number 18 shown below explains what all comes under other income. 

As we can see that other income includes that income or earnings, which are not related to the main business of the company. Interest on bank deposits, dividends, insurance claims, income from royalties, etc. come under other income. Other income is usually a small part of total income, and it should be so. If the contribution of other income is more, it may indicate something wrong and needs to be investigated. 

So by adding the income from the main work of the company, which is also known as revenue from operations (Rs 3436 crore) and other income (Rs 45 crore), the total income of the company in FY14 will be Rs 3482 crore. 

Things to do in this chapter:

1. The financial statement gives information about the company and also tells how the financial condition of the company. 
2. A financial statement consists of a profit and loss account, a balance sheet, and a cash flow statement. 
3. A fundamental analyst uses financial statements and must be aware of what the statement makers are saying through the statements. 
4. The profit and loss statement tells how much profit or loss the company made in any given year. 
5. The profit and loss statement is an estimate, as the company may subsequently change the figures presented in it. Also, the company gives the figures for the current year and the previous year side by side in the statement. 
6. The revenue side of the P&L is also called the top line. 
7. Revenue from operations is the main work of the company.
8. Any other income related to the main business is kept under Other Operating Income. 
9. Income from any other source comes under Revenue from non-operative sources. 
10. Revenue from Operations (- Duty) + Other Operating Income + Other Income = Net Revenue from Operations (Net Earnings)