Table of Contents
5.1 – Expense Information
In the previous chapter, we learned about the income of a company. In this chapter, we will learn about the expenses of the company and the related notes in the P&L statement. Usually, the expenses incurred on different functions of the company are apportioned to different parts – either according to the nature of the expenses or according to the cost of sales method. Every expenditure of the company should be accounted for in the profit and loss statement or in the notes. You can see below that there is a note attached to each expense ie in front of the line item. The first line item on the expense side of the P&L is the cost of materials consumed .) i.e. the cost of the raw material that the company has bought to make its main product. You can see that this is the biggest expense of the company. The expenditure for FY14 is Rs.2101 crores while for FY13 the expenditure was Rs.1760 crores. Detailed information about this is given in Note No. 19.
You can see that in Note 19 information about raw material consumption has been given, the company used Lead, Lead alloys, Separators, and other things which cost Rs 2101 crores.
The next two items are Purchases of Stock in Trade and Change in Inventories of finished goods, work–in–process & stock–in- trade. trading ). Information about these two is given in detail in Note 20.
Whatever finished goods or finished goods the company buys to run its business are called Purchases of Stock in Trade. The company spent Rs 211 crore on this. Next, we will understand it in detail.
The change in inventory of finished goods is the cost of manufacturing goods that the company sold this year but produced in the previous year. The expenditure in FY14 was Rs 29.2 crore.
If this figure is looking at (-) i.e. negative, it means that in FY14 the company manufactured more batteries than it sold. The company subtracts that expense from the current year’s expense (since it is incurred last year) to show the ratio of sales to cost of sales. Later, when the company sells those goods, its expenses will be shown. Whenever this expense is added to the P&L (after the goods are sold), this expense is shown as a line item Purchases of Stock in Trade.
Here are both line items in Note 20 in more detail.
The information given above is very clear and it is very easy to understand. That’s why there is no need to go into more detail here, it is just important to know what is the total cost. You will learn about it in more detail by going to the module on Financial Modelling.
The next line item in the company’s expenditure is Employee Benefits Expense. The salary of its employees, their provident fund, and other such expenses are shown here by the company. Here the expenditure was Rs 158 crore. This is discussed in detail in Note 21.
You must be feeling that the company earning Rs 3482 crore spends only Rs 158 crore on its employees i.e. only 4.5%. Unfortunately, this is the situation in all the companies in the country.
The next line item is Finance Cost / Finance Charges / Borrowing Costs. When the company takes a loan, its interest and other related expenses are shown here. This expenditure of the company in FY14 was Rs 0.7 crore. We will talk about the company’s debt and other things related to it in the chapter where we will be discussing the balance sheet.
The next line item is – Depreciation and Amortization. The company spent Rs 64.5 crore on this. To understand this properly, we need to know about Tangible and Intangible assets.
Any such asset which is physically present and whose value can be added to the total assets of the company is called Tangible Asset. Laptops, printers, cars, machines, buildings, factories, etc. are tangible assets.
An asset that is not physically visible but whose value can be added to the total assets of the company is called an intangible asset. Examples of intangible assets are the company’s brand value, trademarks, copyrights, patents, customer lists, franchises, etc.
The most important thing about any asset is that as the time period of use increases, that asset depreciates. The time period of use of each asset is fixed. For example, for a laptop, this period can be 4 years. The useful life of an asset is as long as the asset is of value to the company. Let us understand this with an example.
Stockbroking firm Poonitrathore.com earned a total of ₹100000. But in the meantime, the company spent ₹65000 to buy a big computer server. The useful life of this computer server is assumed to be 5 years. Now if you look at the figures of Poonitrathore.com, you will see that the company earned ₹100000 and on the other hand spent ₹65000. In this way, only ₹ 35000 was left with the company. But these figures are not telling the true picture.
Remember that this asset (computer server) may have been purchased this year, but its useful life is for the next 5 years. Therefore, it is necessary that its cost should be spread over the next 5 years i.e. instead of showing one big expense, the company can show this expense as small expenses for 5 years.
In this way ₹ 65000 will be divided into 5 years and then 65000 / 5 = ₹ 13000 will be depreciated every year. After showing this depreciation, now Poonitrathore.com‘s earnings will be ₹ 100000 – ₹ 13000 = ₹ 87000
In the same way, the cost of intangible assets is also calculated, but where this method is not called depreciation but amortization.
Now here is a very important thing which you should understand. Poonitrathore.com depreciated its servers for 5 years and spread the cost over 5 years, but the company actually spent ₹65000. Now where will this expense figure appear in the P&L? How do we, as a fundamental analysts, know where the company’s money has gone? For this, you have to look at the cash flow statement. We will understand this in the next chapter. Now, look at Note 23 where depreciation has been shown.
The last line item in the expense portion of the P&L is Other Expenses, which is Rs 434.6 crore. This is a huge amount so it is important to look at it in detail.
It is clear from this note that other expenses include production, selling, administrative and other expenses. For example, the name can be seen here that Amara Raja Batteries has spent Rs 27.5 crore on advertisement and promotion.
Adding all these, you will see that the P&L of Amara Raja Battery has a total expenditure of Rs 2941.6 crores.
5.2 Profit before tax (Profit before tax-Profit before tax)
When the expenses are removed from the earnings but the liability of tax and interest is included in it i.e. both of these are not paid, then this profit is called Profit Before Tax. Looking at the above P&L statement, we will see that ARBL has given figures of its PBT i.e. Profit before tax and exceptional item numbers.
In simple language, the company’s PBT i.e. Profit Before Tax is:
PBT i.e. Profit Before Tax = Total Income – Total Operating Expenses
= 3482 – 2941.6
= Rs 540.5 crore
But here there is an Extraordinary item/Exceptional item which is Rs 3.8 crores which will be deducted from this amount. Such expenses are those which are incurred once for a specific reason and the company believes that these expenses will not be incurred next time or repeatedly. That is why they are shown separately in the P&L.
That’s why now there is a new PBT i.e. Profit Before Tax
540.5 – 3.88
= Rs 536.6 crore
The P&L of ARBL is shown in the figure below: PBT of the company:
5.3 Net profit after tax (Net profit after tax)
The amount that comes out after deducting tax from the total earnings of the company is called the operating profit of the company or net operating profit after tax. It is the last part of any P&L statement. Profit after tax is also called the bottom line of P&L.
As you can see in the above picture, to arrive at PAT i.e. Profit After Tax, we have to subtract all the tax expenses from PBT. Here current tax means the corporate tax which is to be paid this year. This amount is Rs 158 crore. Apart from this, the company has also mentioned other taxes here. Including all the taxes, the company has paid a tax of 169.1 crores. If the company’s tax of Rs 169.2 crore is deducted from the company’s PBT i.e. Rs 536.6 crore, then the amount of PAT comes to Rs 367.4 crore.
Means Total PAT = PBT – Tax
The last part of a P&L statement is EPS, which is shown in both diluted and basic terms. EPS is most commonly used for the financial analysis of a company. By looking at EPS, it is known that how the directors and managers of the company are running the company. EPS means how much money the company’s management has earned on each share of the company. You can see that the management of ARBL has earned 21 per share. Its calculation is shown in the chart below.
The company has stated here that it has 17,08,12,500 shares. If this number is divided by the number of PAT then we get the number of EPS.
in this instance
367.4 cr will be divided by 17,08,12,500 which will come to Rs 21.5 per share
5.4 – Conclusion
Now let us take a look at the P&L statement in its entirety.
Hope now you are understanding this statement more easily. Remember that each line item has a note associated with it. You can use that note to view that line item in detail. However, you will still need to analyze these data to use them in market decisions. We will understand how to do this when we talk about financial ratios. Two more financial statements are attached to the P&L statement – the balance sheet and the cash flow statement. Next, we will discuss them.
Main points of this chapter
- The expense section of the P&L gives all the details of the company’s expenses.
- To know in detail about each expense, the note attached to it can be read.
- The depreciation or amortization method is used to break down an expense into smaller parts and use it in the P&L over a number of years.
- Finance cost means the amount spent by the company to pay interest and take loans.
- PBT = Total Income – Total Expenses – Exceptional Items
- Total PAT = PBT – Total Tax
- EPS tells the earning potential of the company per share. Earning here means earnings after PAT and preferred dividend.
- EPS = PAT/ Total Ordinary Shares Outstanding