Skip to main content



Understanding the P&L Statement


Overview of the financial statements



You can think about the financial statements from two different angles:


From the user’s perspective
A maker prepares the financial statements. He is typically a person with an accounting background. His job involves preparing ledger entries, matching bills and receipts, tallying the inflows versus the outflows, auditing etc. The final objective of the is to prepare transparent financial statements which best represents the true financial position of the company. To prepare such a financial statement certain skills are required, usually these skills are developed through the rigor of a Chartered Accountant’s training program.

The user on the other hand just needs to be in a position to understand what the maker has prepared. He is just the user of the financial statements. He need not really know the details of the journal entries or the audit procedure. His main concern is to read what is being stated and use it to make his decisions.

To put this in context, think about Google. Most of us do not understand Google’s complex search engine algorithm that runs in the backend, however we all know how to use Google effectively. Such is the distinction between the maker and the user of financial statements.

A common misconception amongst the market participants is that, they believe the fundamental analyst needs to be thorough with concepts of financial statement preparation. While knowing this certainly helps, it is not really required. To be a fundamental analyst, one just needs to be the user and not the maker of the financial statements.

There are three main financial statements that a company showcases to represent its performance.

The Profit and Loss statement
The Balance Sheet
The Cash flow statement
Over the next few chapters we will understand each of these statements from the user’s perspective.



The Profit and Loss statement


The Profit and Loss statement is also popularly referred to as the P&L statement, Income Statement, Statement of Operations, and Statement of Earnings. The Profit and Loss statement shows what has transpired during a time period.  The P&L statement reports information on:

The revenue of the company for the given period (yearly or quarterly)
The expenses incurred to generate the revenues
Tax and depreciation
The earnings per share number
From my experience, the financial statements are best understood by looking at the actual statement and figuring out the information. Hence, here is the P&L statement of Amara Raja Batteries Limited (ARBL). Let us understand each and every line item.














Comments

Post a Comment

Popular posts from this blog

OPTION TRADING

A Special Agreement There are two types of options – The Call option and the Put option. You can be a buyer or seller of these options. Based on what you choose to do, the P&L profile changes. Of course we will get into the P&L profile at a much later stage. For now, let us understand what “The Call Option” means. In fact the best way to understand the call option is to first deal with a tangible real world example, once we understand this example we will extrapolate the same to stock markets. So let’s get started. Consider this situation; there are two good friends, Ajay and Venu. Ajay is actively evaluating an opportunity to buy 1 acre of land that Venu owns. The land is valued at Rs.500,000/-. Ajay has been informed that in the next 6 months, a new highway project is likely to be sanctioned near the land that Venu owns. If the highway indeed comes up, the valuation of the land is bound to increase and therefore Ajay would benefit from the investment he would mak...
Post a Comment
Read more
CALL OPTIONS BASICS Breaking the Ice The options market makes up for a significant part of the derivative market, particularly in India. I would not be exaggerating if I were to say that nearly 80% of the derivatives traded are options and the rest is attributable to the futures market. Internationally, the option market has been around for a while now, here is a quick background on the same – Custom options were available as Over the Counter (OTC) since the 1920’s. These options were mainly on commodities Options on equities began trading on the Chicago Board Options Exchange (CBOE) in 1972 Options on currencies and bonds began in late 1970s. These were again OTC trades Exchange-traded options on currencies began on Philadelphia Stock Exchange in 1982 Interest rate options began trading on the CME in 1985 Clearly the international markets have evolved a great deal since the OTC days. However in India from the time of inception, the options market was facilita...
Post a Comment
Read more

2 Must Read Books For Stock Market Investors.

2 Must Read Books For Stock Market Investors. It’r really important to know the basics about the stocks before entering the market as lack of knowledge in this field almost always leads to a huge financial loss. Further, loss of capital also leads to a decline in the morale of the investor. Therefore, today I am going to give you the names of 10 must read books for the stock market investors. So, be with me for the next few minutes while i give you a brief introduction and review about the 10 must read books for stock market investors. Here it goes: 2 Must Read Books For Stock Market Investors: This book is ranked 1 in my list of 10 must read books for stock market investors.  Peter Lynch,  the Author of the book, is one of the most successful fund manager with  an average annual return of 30%  on his portfolio for a period of 13 years. A great record for a mutual fund manager. This classic book explains all the important basics that a beginn...
Post a Comment
Read more