How to Study Financial statements of Indian Companies-Introduction
Whether you are going to invest in Stock Markets or buying a company, you need to have the skills to value a company. To value a business you need to understand the financial statements of company. Financial statements are the face of company. They speak truth and one need to identify if any misstatement lies within.
Financial statements are set of records which displays the financial stand of any business along with profitability. Financial statements are the core source to value a business and are considered as prime documents to study the financial performance of company.
Before we jump into subject matter, How to study the financial statements of a company, let’s understand framework and structure of the financial statements.
- Indian companies present their financial statements as per the requirements of Companies Act 2013.
- Indian Companies follow the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI).
- Financial Statements are audited by a Chartered Accountant.
- Financial statements comprises of
- A Balance Sheet as at the end of the Financial Year.
- A Profit and Loss Account or an Income and Expenditure Account (in the case of a Company carrying on any activity not for Profit) for the Financial Year.
- Cash Flow Statement for the Financial Year.
- A Statement of Changes in Equity.
- Any Explanatory Note annexed to or forming part of any document referred to above.
Understanding basics of Balance Sheet
Balance sheet is part of financial statements and discloses the book value of Assets and Liabilities on a given date. Balance Sheet comprises of Outsiders liabilities and Assets owned by company.
Liabilities and Assets are further divided into Shareholders’ funds, Current and Non-Current. Current Assets and Liabilities are those which are liquid in nature and have a life cycle up to one year, rest are Non-Current.
Format of a sample Balance Sheet
Liabilities and Assets are categorized according to prescribed rules and presented on the face of Balance Sheet. More information about each line item will be available in the mentioned note number. For Example, Note 3 will disclose the information related to share holding and movement in share capital.
Understanding basics of Profit and Loss Account
Profit and Loss account (P/L) provides information related to financial performance of company. By understanding how to study a P/L account, you can understand the business performance of company.
Various users who analyses P/L account are to:
- Find the operating profit or Industry and comparing it to operating profit margin of Industry.
- Analyzing the operating margins of competitors.
- Analyzing the core business performance.
- Analyzing the bottom line performance of company.
- Segmental analysis of business.
- Revenue model and understanding the revenue channels of company etc.
Format of P/L account generally followed and prescribed is presented below for your reference.
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The basic formats of Balance Sheet and Profit and Loss account is explained in above posts.
Next posts will be ragarding How to analyze each and every line item of Balance sheet and Profit Loss account with examples.
If you have any doubts please ask it here itself.