Understanding Basics of Financial Statements

Understanding Basics of Financial Statements
Presented By:
Vishal Thakkar
ConTeTra Universal LLP

ConTeTra Universal LLP All Rights Reserved.2
Objectives of the Presentation
 Understanding the basic concepts and terms
used in the Financial Statements.
 Understanding the ratios used for analyzing
the Financial Statements.
 Discussing factors that drive corporate
valuations.

 Objectives of Financial Statements
 Basic Accounting Concepts
 Structure of Profit & Loss Statement
 Structure of Balance Sheet & Cash flow
Statement
 Q & A
Contents

 To provide information to stakeholders about:
 Performance of the company during a given period:
 Financial health of the company as on a specified date.
 To furnish information useful in making
decisions relating to investment and lending.
Objectives of Financial Statements

 Profit and Loss Statement.
 Balance Sheet.
 Cash Flow Statement.
 Statement of Accounting Policies and Notes
to Accounts.
Basic Financial Statements

Dual Impact of Financial Transactions
INCOME EXPENDITURE
ASSETS LIABILITIES

Examples of Financial Transactions
 Salary Receipt
 Rent payment
 Purchase of House
 Taking of Housing Loan
 Buying MF Units
 Loan EMI

Your own P & L & Balance Sheet
Personal P & L A/C (Monthly)
 Income Rs.
Salary 15,000
Interest 1,000
Total Income 16,000
 Expenditure
Utilities 3,000
Groceries 3,000
Education 2,000
Maintenance 2,000
Total Exps. 10,000
 Net Income 6,000
Loan EMI 3,000
 Net Savings 3,000
Personal Balance Sheet
 Assets Rs. Lakhs
House Property 11
Bank balances 2
Shares 1
Mutual Funds 1
 Total assets 15
 Liabilities
Housing Loan 4
Personal Loan 1
Total Liabilities 5
 Net wealth 10

 Business Entity: An Enterprise is different
from the persons who own it.
 Going Concern: Enterprise will continue to
exist in a foreseeable future.
 Accrual: Revenue and expenses are
recognised as they are incurred and not as
money is received or paid.
 Substance over form: Substance of a
transaction takes precedence over legal form.
Fundamental Accounting Concepts

 Prudence: Recognise all known expenses and losses.
Do not recognise revenue and profits unless you are
sure of realisation of the same.
 Capital Expenditure: Expenditure which brings into
existence asset or benefit of a long term nature. e.g.
Building, computers, furniture, equipment.
 Revenue Expenditure: Expenses which are incurred
to earn revenue and which are written off over a normal
accounting period. e.g. salary, rent, stationery,
electricity.
Fundamental Accounting Concepts

 A statement showing revenues and expenditure over a
defined period of time. It shows results of business
operations for a defined duration.
 Profit =Total Income – Total Expenditure.
 It is a measure of financial performance.
 Income and Expenditure are recognized in accordance
with Generally Accepted Accounting Principles (GAAP).
Profit and Loss (P&L) Account

Revenue
Cost of
Material
Selling, General
& Admn (SGA)
Employee Costs
Operating Profit
(EBIDTA)
Depreciation
Interest
Tax
Profit After Tax
Structure of a P & L Account

 Total Revenue = Sales + other income.
 Sales is usually the amount invoiced during the period for
product and services.
 Some of the amounts invoiced may not have been
collected at the year end.
 Other income would include dividend, interest etc.
Revenue

 Material Cost - Raw Materials and Consumables.
 Employee Related Expenses (ERE) - Salary & allowances,
bonus, staff welfare and benefits.
 Selling, General & Administration Expenses (SGA) -
Bizdev., Advertisements, Commission, Travel, Marketing
office expenses, Rent, Electricity, Maintenance, Insurance,
Housekeeping, Telephones, Internet link etc.
Expenditure

Depreciation
 Depreciation is a charge for use of capital assets.
 Non – cash charge to the P&L.
 Depreciation method ensures that the original cost of an
assets less its salvage value is spread over estimated
useful life of an asset.
 Depreciation methods: Straight Line / Reducing Balance.

Interest cost
 Interest is an amount payable to the lenders,
e.g. Banks, Financial Institution, etc.
 The interest will arise in relation to
 Working capital loans
 Term Loans

Provision for Tax
 Provision for tax relates to income tax payable
on the company profit.
 It is a notional Figure arrived at by using the
provisions of Income Tax Law, but the Final tax
liability is assessed by the assessing officer of
the Income tax Dept and the difference is settled
accordingly

Profit & Loss Account
Emp Exp 45
Interest 2
Revenue:100
OPG Profit 35
Depreciation 10
Selling Exp 5
G & A Exp 15
Tax 0.5PBT 23
PBIT 25
PAT 22.5

Dividend
 Dividend: A portion of profit which is paid to the share -
holders.
 Lenders are paid fixed rate of interest, whereas
shareholders are paid dividend depending upon the
profits and the policy of the company.
 The Board of the Company recommends the rate of dividend
based on the profitability and policy of the Company.
 In India, currently there is no tax on dividend received by the
shareholder as the company pays dividend tax.

Retained Earnings (RE)
Profit After Tax 22.5
Retained Earnings 20
Dividend 2.5

Profitability Ratios
Operating Profit Margin
or EBIDTA Margin
= Operating Profit / Sales
= 35 / 100 = 35%
Operating Profit shows
intrinsic profitability of a
business.
P & L Account Amount Rs. Cr.
Revenue 100
Emp. Costs 45
SGA 20
Operating Profit 35
Depreciation 10
PBIT 25
Interest 2
PBT 23
Tax 0.5
PAT 22.5

PBIT Ratio
= PBIT / Sales %
= 25 / 100 = 25%
PBIT Ratio shows
profitability of a
business after
accounting for
depreciation.
Revenue 100
Emp. Costs 45
SGA 20
Operating Profit 35
Depreciation 10
PBIT 25
Interest 2
PBT 23
Tax 0.5
PAT 22.5

Net Profit (PAT) Ratio
= PAT / Sales %
= 22.5 / 100 = 22.5%
Net Profit Ratio shows
profitability of a business
after accounting for all
expenses including
depreciation, interest &
tax.
Revenue 100
Emp. Costs 45
SGA 20
Operating Profit 35
Depreciation 10
PBIT 25
Interest 2
PBT 23
Tax 0.5
PAT 22.5

Industry Comparison – P&L
Particulars (Amt in Crs.) Havells % Finolex %
Net Sales 6,585.96 100.00% 2,670.75 100.00%
Other Income 134.28 2.04% 100.21 3.75%
Total Income 6,720.24 102.04% 2,770.96 103.75%
Total Expense -5,761.82 -87.49% -2,299.32 -86.09%
EBIDTA 958.42 14.55% 471.64 17.66%
Less: Depreciation -119.63 -1.82% -48.03 -1.80%
PBIT 838.79 12.74% 423.61 15.86%
Less: Interest -12.15 -0.18% -4.29 -0.16%
PBT(Before Exceptional Item) 826.64 12.55% 419.32 15.70%
Less: Exceptional Item -57.81 -0.88% 0.00 0.00%
PBT (After Exceptional Item) 768.83 11.67% 419.32 15.70%
Less: Prov for Tax -229.79 -3.49% -103.44 -3.87%
Net Profit (PAT) 539.04 8.18% 315.88 11.83%

Balance Sheet
 A statement of Assets and Liabilities of the Company.
 A snapshot view of a business at a defined point of time.
 Balance Sheet is a measure of financial resources or wealth of a
company whereas Profit and Loss Account is an indicator of
performance of a company,
 Balance Sheet is always balanced. Assets are equal to
liabilities.

Assets and Liabilities
 Liabilities: Amounts owed by the Company to parties
external to the Company – sources of funds.
 Assets: Resources owned by the company – Application
of funds.
 It could be presented in either a Horizontal or vertical
format.

Balance Sheet: Horizontal Structure
Equity Capital (10)
&
Reserves (60)
Fixed Assets (70)
(e.g. Land & building,
Plant & machinery ,
Computers, DG set)
Loan Funds (30)
Current Liabilities (10)
(e.g. creditors, provision)
Current Assets(40)
(e.g. cash, inventories,
Debtors)
Liabilities Assets
Total (110) Total (110)

Balance Sheet: Vertical Structure
Assets
(owned)
Application
Liabilities
(owed)
Sources
Loan Funds (30)
Fixed Assets (70)
Net Current Assets (30)
[Current Assets (40)
less: Current Liabilities (10)]
Equity Capital (10)
Reserves (60)

Find the items in the wrong heading
 Fixed Assets
 Land
 Building
 Finished products
 Machinery
 Computers
 Furniture and
fixtures
 Current Assets
 Cash
 Account receivables
 Raw material
 Motor vehicles
 Loans and advances

How do they relate to each other?
Balance Sheet
31 March 2017
Profit & Loss Account
Cash Flow
Balance Sheet
31 March 2018

Net Worth
 Net worth
= Share Capital +Reserves
= Rs. 10 +Rs. 60 = Rs. 70 Cr.
OR
 Net worth
= Total Assets – Loan Funds
= Rs.100 – Rs.30 = Rs. 70 Cr
Balance Sheet Amount Rs. Cr.
Share Capital 10
Reserves 60
Net Worth 70
Loan Funds 30
Total Liabilities 100
Net Fixed Assets 70
Current Assets 40
Current Liabilities 10
Net Current Assets 30
Total Assets 100

Working Capital
 Working Capital
= Current Assets –
Current Liabilities
= Rs. 40 - Rs.10
= Rs. 30 Cr.
Share Capital 10
Reserves 60
Net Worth 70
Loan Funds 30
Net Fixed Assets 70
Current Assets 40
Net Current
Assets
30
Total Assets 100

Balance Sheet Ratios: Debt to Equity
 Debt to Equity Ratio
= Long Term Debt /
(Equity + Reserves)
= Rs. 30 / (Rs.10+60)
= Rs. 30 / Rs. 70
= 0.42:1
Share Capital 10
Reserves 60
Net Worth 70
Loan Funds 30
Net Fixed Assets 70
Current Assets 40
Net Current
Assets
30
Total Assets 100

Balance Sheet Ratios: Current Ratio
 Current Ratio
= Current Assets / Current
Liabilities
= Rs. 40 / Rs.10
= 4:1
Share Capital 10
Reserves 60
Net Worth 70
Loan Funds 30
Net Fixed Assets 70
Current Assets 40
Current
Liabilities
10
Net Current
Assets
30
Total Assets 100

Mixed Ratio: Return on Equity
 Return on Equity
= Profit After Tax /
Average Equity Cap.
and Reserves
= Rs. 22.5 / ((Rs. 70 + Rs.
50) / 2)
= Rs. 22.5 / 60
= 37.5%
P & L Account 31.3.18
Rs. Cr.
31.3.17
Rs. Cr.
Sales 100 80
PBIT 25 20
PAT 22.5 18
Balance Sheet 31.3.18
Rs. Cr.
31.3.17
Rs. Cr.
Share Capital 10 10
Reserves 60 40
Net Worth 70 50
Loan funds 30 20
Total Capital
Employed
100 70

Mixed Ratio: Return on Capital Employed
 ROCE
= Profit before Interest
& Tax (PBIT) / Avg.
Capital Employed.
= Rs. 25 / ((100+70) / 2)
= 29.4%
Rs. Cr.
31.3.17
Rs. Cr.
Sales 100 80
PBIT 25 20
PAT 22.5 18
Rs. Cr.
31.3.17
Rs. Cr.
Share Capital 10 10
Reserves 60 40
Net Worth 70 50
Loan funds 30 20
Total Capital
Employed
100 70

ROCE
ROCE = PBIT / Average Capital employed
= (PBIT / Sales) X (Sales / Avg.Capital Empl.)
= Profit Margin X Capital Turnover Ratio
= Operating Efficiency x Efficiency in utilising
capital.

Mixed Ratio: Earnings Per Share (EPS)
 EPS
= Profit After Tax / No. of
shares outstanding
= Rs. 22.5 Cr. / 1 Crore
Shares
= Rs. 22.5
Sales 100
PBIT 25
PAT 22.5
Share Capital
(1 Crore shares)
10
Reserves 60
Net Worth 70
Loan Funds 30

Asset Turnover Ratios
 Fixed Asset Turnover
Ratio
= Sales / Avg. Fixed
Assets
= Rs. 100 Cr / ((70+50)/2)
= 1.67
Rs. Cr.
31.3.17
Rs. Cr
Sales 100 80
PBIT 25 20
PAT 22.5 18
Rs. Cr.
31.3.17
Rs. Cr
Net Fixed Assets 70 50
Net Current Assets 30 20
Total Assets 100 70

Asset Turnover Ratios
 Inventory Turnover Ratio =
Sales / Avg. Inventory
 Debtors Turnover Ratio =
Sales / Avg. Debtors
 Capital Turnover Ratio =
Sales / Avg. Capital Employed

Industry Comparison – Balance Sheet
Particulars (Amount in Rs. Crs.) Havells % Finolex %
Equity 62.49 1.26% 30.59 1.41%
Reserves 3,211.09 64.74% 1,846.85 85.26%
Shareholder Funds 3,273.58 66.00% 1,877.44 86.68%
Non-Current Liabilities 127.41 2.57% 25.47 1.18%
Current Liabilities 1,559.00 31.43% 263.11 12.15%
Total Liabilities 4,959.99 100.00% 2,166.02 100.00%
Non Current Assets 1,221.74 24.63% 423.02 19.53%
Non - Current Investments 283.33 5.71% 94.55 4.37%
Financial Assets 175.21 3.53% 214.03 9.88%
Other Non-Current Assets 88.59 1.79% 0.62 0.03%
Current Assets 3,191.12 64.34% 1,433.80 66.20%
Total Assets 4,959.99 100 2,166.02 100

Concept of Valuation of Equity Shares
 Face Value
 Book Value
 Market Value

Valuation of Equity Shares: Face/Book Value
 Face Value is par value of the
share appearing on the face of
share certificate
= Rs. 10 per share.
 Book Value is the net worth
divided by a no. of outstanding
shares.
= (Share Capital + Reserves) /
No. of outstanding shares.
= Rs. 70 Cr. / 1 Cr.
= Rs. 70 per share.
Share Capital
(1 Cr. Shares of
Rs.10 each)
10
Reserves 60
Net Worth 70
Loan Funds 30
Net Fixed Assets 70
Current Assets 40
Net Current Assets 30
Total Assets 100

Valuation of Equity Shares: Market Value
 Market Value (MV) of a listed share is the price of
the share quoted on a recognized stock exchange.

Current Valuations of select Companies
Name of the
Company
Face Value Book Value Market
Value**
Havells 1 52.39 501.10
Finolex 2 122.75 677.25
KEI 2 60.86 369.60
** As on 05/02/2018

Price Earning Ratio
 PE = MV / EPS 100 / 10 = 10
 PE is driven by a no. of subjective and objective factors
associated with the company and the industry it belongs
to:
 Projected Growth of sales, profit,cash flow and EPS.
 Company brand equity, management practices,
corporate governance.
 Market sentiment
 MV = EPS x Price Earnings (PE) Ratio
 EPS = PAT / No. of outstanding shares

Current PE Ratios of select Companies
Name of the
Company
EPS PE MV**
Havells
8.63 58.12 501.10
Finolex 20.70 30.73 677.25
KEI 12.72 26.84 369.60
** As on 05/02/2018

Market Value of a Company
 Market Value of a company or Market Capitalization is the
price you will pay to buy all the shares of a company at a
given point of time.
= No. of shares outstanding x Market value of a share.
 For Example, market capitalization of Havell’s is as
follows:
No. of Shares = 62.51 Crs
Price of a share = 501.10 per share
Market Cap. = 31,323.76 Crs

Q & A

Thank you!!

Understanding Basics of Financial Statements

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