Reading Profit & Loss Statement
Many people in India invest in stock markets based on recommendations. Sometime these recommendations come from (so called) experts sitting on TV and sometime from experts (again so called) among our friends and relatives. Partly we believe these experts as they are so confident but part of belief and disbelief come from our lack of understanding of financial markets. I have often heard my father (who is in and out kind of player in stock markets) say that these experts know nothing but still he often goes by what they say mostly because he doesn’t understand market and reported financials of companies despite him being a commerce graduate and active businessman for last 30 years. Being a businessman he knows all the tricks of accounting innovations to save tax and believe me he is really good with this but still while investing in stocks he never look at financial statements, quarterly reports of companies because he feels he is not able to comprehend them. I have always found it perplexing to understand because these statements are so much self explanatory for me but still we have a kind of phobia in investor community about these reports.
In this post I will try to explain one of the most important reports that companies publish with market regulator (SEBI) and exchanges (BSE & NSE) periodically. This report is available on company websites as well and is known as Profit and Loss (P&L)statement. Let’s start by listing some of facts about P&L statement
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P&L statement, as name suggests is a statement of profit and loss for a company
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P&L statement is for a period of time, 1 month, quarter, year etc
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P&L statement forms part of quarterly filings that companies are mandated to submit with SEBI and exchanges
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As part of quarterly filings companies are legally required to release P&L statement to public within 45 days of end of quarter (60 days in case of Jan-Mar Quarter)
This is how a typical P&L statement looks like
* This is Reliance Industries Limited statement screenshot. Actual filing is here
Lets try to understand each and every component of this statement in details but if you are in Hurry, you can safely ignore points which are Green in color
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This is Unaudited statement. It means it has not been verified by any independent auditor. Mostly only Annual statements are audited
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This is a consolidated statement. It means it contains finances of whole group or everything that investor owns by investing in this company. For many reasons like geographic, tax etc companies invest in other companies. These investments include wholly owned subsidiary (including foreign), Joint ventures etc. A consolidated statement means profits or losses of those companies are included in this statement while a stand alone statement will mean it represent only the parent company. An example of this is Tata Motors, In Apr-June, 2016 quarter Consolidated revenue for the group (Tata Motors Group not Tata Group) was 66k Crore while standalone revenue was only 11k Crore. No prize for guessing where most of the revenue in consolidated operations is coming from. Please note that in case of partial ownership of that company, only share attributable to parent company is recorded in consolidated statement. So In a nutshell consolidated statement is everything you own by owning that stock.
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Numbers are shown for quarter as well as part of financial year completed. It mean in June you will only see quarter results while in Sep and Dec you will see 6 months and 9 months numbers as well. In March numbers for whole year are reported. In regulatory filings, SEBI mandates companies to show numbers of Quarter before and year before to make meaningful comparisons
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First row of statement represents income from operations that represents total sales of the company in period, Most of the rows are self explanatory so I will skip while listing some tricky items
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Depreciation, amortization and depletion: These are probably most confusing part of account keeping and sometime even books worth of explanations are not enough. They are charged for long term investments like machinery etc which losses their sale-able value with each passing year. In a summary these are not cash expenses. It mean they cash is not spend but just reported.
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Exceptional Items: They keep on happening in modern businesses and details are generally provided in footnotes. We should ignore them while performing analysis. But keep an eye on frequency and size. If they are very frequent than it can be a corporate governance issue.
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Earning Per Share: This is total earning for every share. Probably most important number for a laymen. Basic and diluted are often same but sometime marginally different due to convertible securities and other financial innovations which most investors can safely ignore. Just focus on diluted EPS. Be alert if difference between basic and diluted EPS is huge (Again a corporate governance flag which need to be deeply investigated)
P&L statement is one of most important financial statement which can easily show company growth rates, its profitability and trends in sales and expenses. It helps in identifying many metrics which are used for analysing stocks like Operational Margin, Tax Rates etc. We will compare these ratios and metrics in some other post later.
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CandleStick Analysis : Brightening the Trading
A robust decision making framework demands analytical approach which takes into the view the parameters, limitations and environment surrounding and including the problem universe. Similarly when it comes to any market – equities, forex, commodities – which has inherent component of speculation in it, Technical Analysis finds favour, at least among the traders (short term) , if not investors (long term).
Technical Analysis at a very crude level means analyzing and predicting market based on ‘historical data’ i.e. historical values of the underlying asset being analysed. Number of tools are available to perform technical analysis. One of them is CandleStick Pattern. In this article we are going to explore the basics of this 400 year old Japanese technique, invented by rice traders , to be followed by more comprehensive write up on “Patterns” formed by CandleStick charts in coming articles.
A single candlestick is used to depict the valuation data of an underlying asset (equities, forex, commodities) for a day. It is plotted against “Date” on a graph, this graph throws “patterns” formed by abutting candlesticks belonging to different dates which is used to deduce predictions.
A candlestick consists of four data –
- Opening price of the asset (O)
- Closing price of the asset (C)
- Highest price of the asset achieved in the day (H)
- Lowest price of the asset achieved in the day (L)
A candlestick consists of two parts –
- Body – “Broader” part of the candlestick. It depicts “O” at one end and “C” at other end.
- Shadow – “Thinner” part of the candlestick depicting “H” and “L” data of the asset.
“O” and “C” are plotted on the extreme ends of the “Body”, hence length of the Body is decided by the difference between the values of “O” and “C”. “H” and “L” form the two extremes of “Shadow” part.
Based on different combinations of “O”, “C” , “H” and “L” , there can be motley forms of candlestick.
Lets first consider variations based on values of “O” and “C” –
- C > O , represented by “White Body”
- O > C , represented by “Black body”
- C = O , represented by horizontal line in place of Body, also called Doji.
Candlesticks based on “Shadow”
White Morubozu – A white candle without any shadow on any side. It signifies very bullish market condition as bulls manage to close the markets on the same level as the highest valuation of the day. The fact that value didn’t go below the “O” also signifies that Bulls had a field day.
Black Morubozu – Complete opposite of the White Morubozu, it is formed when Bears rule the market and value closes at the lowest level achieved in the day and all valuations achieved during the day are below the Open Price.
Opening Morubozu – They denotes candles that do not have shadows attached to their “O” part of the body. Same as White Moruvozu, White Opening Morubozu also signifies Bullish trend but albeit of lesser intensity than white Moruvozu. Similarly Opening Morubozu with black body signifies bearish sentiment , but of lesser intensity than Black Morubozu.
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| Opening Morubozu |
Based on CandleStick’s size, position on the chart and relative placement (during uptrend or downtrend), predictions are made by the traders. Many traders also use them in consonance with other Technical Analysis tools like MDA, RSI etc. to strengthen their predictions.
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