Placeholder Image

Subtitles section Play video

  • Hello, in this unit of security analysis and portfolio management we are going to discuss

  • financial statements and their analysis; financial statements mean, the reports that are published

  • by different companies at the end of a particular accounting period; why do we need this financial

  • statement? It is because when the investors have invested lot of money in the company

  • they like to know about the performance of the company at the end of the particular period;

  • having kept that in mind and also taking into consideration different other stake holders

  • interest like government, suppliers, creditors, banks and all, the companies report their

  • financial performance at certain points of time.

  • In this particular session we are going to discuss about what the financial statements

  • are and what is their typical content, why we should go for financial statement analysis,

  • why it is the purpose and what are the tools that we can use for financial statement analysis.

  • As we discussed financial statements are supposed to provide information that bridge the gap

  • between the company and the investors in terms of what the company is doing so that the investors

  • come to know at certain period of time.

  • In this, coming to the first one regarding what the financial statements that we have

  • are - financial statements we haveone of the major statements is called the balance

  • sheet, then we have another called income statement and then we have got a cash flow

  • statement. Balance sheet, income statement and cash flow statement - they are published

  • regularly; if it is annual accounting year then at the end of the particular year we

  • will find these three reports getting published. What happens is that at the end of the year

  • - after the accounts are audited - the company comes with the financial results and also

  • comes with something documental - annual report; annual report will have these things and at

  • the same time if the company is also listed in the stock exchange, as per Indian law,

  • the companies are supposed to disclose their financial status every quarter - they will

  • be disclosing the summary balance sheet or summary income statement at the end of every

  • quarter. They will disclose to stock exchange and also they will publish the same thing

  • in the leading news papers - financial news papers and other news papers; through that

  • the investors can come to know about it. Coming to the major aspect of balance sheet

  • - balance sheet is essentially a statement of financial position; it says what the company

  • has at a particular point of time, it is also a statement of assets and liabilities; assets

  • are what the business owns and only with those things can the business prosper, can generate

  • revenue. So, assets indicate what the company has, how well it can do, what revenue it can

  • generate, what the source of revenue and all those things can be known.

  • That means, how efficiently an asset can be utilized, whether these assets are relevant

  • assets are not; investors can come to know from these financial statements called balance

  • sheets - these assets. Liabilities are something, which the business owes to non-owners; then,

  • we have something called equities - it is what the business owes to the owners.

  • In fact, whatever the business owes to the owners or outsiders, it is broadly known as

  • liability - it is liability of the business to the outsiders assess; broadly outsiders

  • can include the owners, but in a very management point of view the owners are the insiders

  • of the company and they have invested in the company they also expect something from the

  • company - to that extent the business is liable to the owners.

  • Broadly ownersstake is a liability for the company, but they are insiders of the

  • company because they own the company assets; otherwise whatever they owe to the banks,

  • suppliers - because they have taken certain credit - banks, because they have taken a

  • loan or other investors like debenture holders, bond holders from whom they have borrowed

  • money they come under liabilities of the business. Then, we have another major statement, which

  • talks about the periodic financial performance - how this company did, that is called income

  • statement; income statement essentially gives a summary of revenues and expenses; revenue

  • from the main line of activity, revenue from other sources of income; like, the company

  • might have invested some thing in securities and other investments in some other companies;

  • from that the company might have got some interest or dividends; that also comes as

  • one of the sources of revenue and then something called expenses also is there.

  • Revenues and expenses are the major part of income statement and expenses will be given

  • a broad classification like manufacturing expenses, other operating expenses, financial

  • expense like interest, then tax provision and subsequently after the tax is paid by

  • the company then one has the profit after tax and how the profit is distributed; all

  • these things are given in the income statement. Another major statement that we have is, called

  • cash flow statement; it talks about where the cash has come from and where the cash

  • has gone; this cash flow statement classifies the cash flows in three ways: one is operating,

  • another investing and next is financing.

  • We will be discussing about these typical statements one by one in detail; coming to

  • the balance sheet which give the assets, the assets are actually classified on different

  • heads and the first asset is called the fixed asset, then we have got investments; fixed,

  • then we have got current assets, then we have got intangible assets; when we talk about

  • fixed assets, fixed assets means the company owns this particular asset or holds on to

  • the asset for a long period of time. It is not necessary that asset should be fixed with

  • the land or something like that rather the company has the intention of holding this

  • asset for a long period of time for a particular purpose.

  • One simple example could be the plant and machine for a manufacturing company or building

  • for a manufacturing company or any company for that matter - that becomes a fixed asset,

  • because this plant and machine could operate for long period of time and generate goods

  • which can be sold over a period of time. That is why plant and machinery is called

  • a fixed asset, but these same plant and machineries which are sold by an outlet is like a trading

  • concern - it is not a fixed asset, it is like a short term asset because they are not be

  • held for a long period of time. Next, in the assets category is investment;

  • investment means the investments made by the company in group companies or some other company

  • or subsidiary companies, where the intention of the investment is for a long term; the

  • company does not make short term investments rather it has made the investment for a long

  • period of time - like a strategic control - they have another company.

  • If they have made some investment equity of the company, they are stake holders of a particular

  • company - may be inside the country or outside country - or a certain joint venture they

  • have participated in - some ownership, in that case investments where they are supposed

  • to get certain income in terms of may be dividend or interest from that company where they have

  • invested their money. The next thing that we have is called the

  • current assets; current assets typically mean the assets which can be converted into liquid

  • cash over a short period of time - typically it is one year; whatever asset that they have

  • - the company has - that can be converted to into cash or the company has intention

  • to convert it in to cash in a short period of time - that is called current assets; current

  • assets have got different types of assets - the first type of asset is cash and cash

  • equivalents. Whatever cash there is with the company or

  • whatever is with the bank by the company that is called cash; cash equivalent is - the company

  • might have put some short term deposits with the intention that instead of keeping the

  • money idle they can earn some small amount of interest on that; they may have put the

  • money in some short investments, but the idea is to get back the money whenever we need;

  • in that case, they will sell the investments and get the cash.

  • Then we have the receivables; receivables meanwhere we have got thecompanies made

  • some credit sales and after the credit sales whatever amount is not collected they are

  • known as receivables or daters; that is also supposed to be collected back within a short

  • period of time, that is why it is called as current assets.

  • We also have one more aspect - marketable securities, which are also like cash equivalent

  • where the company has invested in treasure bill or some certificate deposit or commercial

  • paper and this money can come whenever the company needs; the temporary investments can

  • be sold and cash can be generated to meet the regular requirement.

  • The next category of current asset is the inventory; inventory means that which is kept

  • for production or for sales; inventory can be like raw material of the company, it can

  • be the working process of the company, it can be the finished goods of the company,

  • it can also be spare parts of the company; but, the inventory is supposed to be converted

  • into finished goods and sold. If the company is a trading concern typically their inventory

  • will be the finished goods, which they have procured from suppliers and they are going

  • to sell them. Like some retail outlets or some shopping

  • malls where they hold so many types of stock for the customers - those things are called

  • the inventory; they do not produce them rather they procure from different suppliers and

  • sell them, but they are categorized as inventory and they are supposed to be sold in a very

  • short period of time that is why it is called a current asset.

  • The next that we have is loans and advances; loans and advances is short term loans or

  • short term advances given to the group companies or employees have been given some advances

  • which they are going to pay back within a very short period of time, that is called

  • the loan advances and this is also known as a current asset.

  • Then, we have what other current assets which is not covered under this earlier category

  • - like, some company might have paid some expense in advance that is called pre paid

  • expenses; that is also called a current asset, because having paid the expense earlier we

  • are going to get the benefit of that expense within a very short period of time that is

  • why it is called pre paid expense. Any other current asset is also part of this

  • particular group; essentially, this current asset talks about that how liquid the company

  • is; that means, if the there is a need for meeting certain expenses does this company

  • have the to meet the expenses or not; or the company will either go for liquidating some

  • other non-current assets or fixed assets and meet the obligation or maybe it will go for

  • borrowing or something, which is not a proper sign - it is not a good sign for the company;

  • if there is a need and you have to meet the regular expenses - you should have the liquid

  • assets in your hand so that you can get the expenses on time.

  • Another category of assets is called intangible assets; for instance the fixed assets investments,

  • current assets - they are tangible, because you can feel that and you can see those assets;

  • whereas, intangible assets are something which you can feel, but you cannot see that and

  • intangible assets can be classified as like goodwill of the company; if the company has

  • got some patents, or company has got some copyrights, company has made some R &D and

  • technology has been developed and patented; all those things come under intangible assets;

  • as long as thisbut all the assets which have got some economic benefit to accrue to

  • the company then this company can report as an asset.

  • If there is no economic benefit to come from this particular holding of the asset then

  • it is better that company does not show that; rather, it should write off this asset for

  • at a particular period of time; asset means that which can give some economic benefit

  • in future, which can be classified into all this types that we have discussed just know.

  • Next, we go to the balance sheet that is called liabilities; the liabilities we haveagain

  • the classification we have are: first one is called current liabilities and provisions;

  • current liability is something which the company has to pay within a very short period of time

  • - typically, one year; just like the current assets can be converted into cash within one

  • year and similarly current liability is liability which the company has to meet within one year

  • period of time. There we have the categories like creditors,

  • then we have accounts or notes payable; creditors meanthe company might have purchased certain

  • goods from the supplier on credit which has to be paid may be within one month or two

  • months or something or whatever the supplier has asked; till the money is paid, that is

  • a liability of the company; it is a short term liability it has to be taken care of

  • within a certain period - a short period of time.

  • Accounts and notes payable are somethingwhich are certain instruments which indicate that

  • the company owes something to someone over a short period of time, which has to be honored

  • <