The most important part of fundamental analysis involves delving into the financial statements or financial reports of companies. Financial information, which accounting helps to standardize, is presented in the companies’ financial reports. Indian listed companies must periodically report their financial statements to the investors and regulators. Why is this so?
The laws and rules that govern the securities industry in the India derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. To achieve this, the Securities and Exchange Board of India (SEBI), the market regulator in India, requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves if a company’s securities are a good investment. Only through the steady flow of timely, comprehensive and accurate information can people make sound investment decisions.
Listed companies have to send all their shareholders annual reports. In addition, the quarterly financials of the company can be found on the stock exchanges’ websites and on the website of the company. Here are the financial statements of a major IT services company, XYZ Technologies Ltd. (XYZ)
The laws and rules that govern the securities industry in the India derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. To achieve this, the Securities and Exchange Board of India (SEBI), the market regulator in India, requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves if a company’s securities are a good investment. Only through the steady flow of timely, comprehensive and accurate information can people make sound investment decisions.
Listed companies have to send all their shareholders annual reports. In addition, the quarterly financials of the company can be found on the stock exchanges’ websites and on the website of the company. Here are the financial statements of a major IT services company, XYZ Technologies Ltd. (XYZ)
The primary and most important source of information about a company are its Annual Reports, prepared and distributed to the shareholders by law each year. Annual Reports are usually well presented. A tremendous amount of data is given about the performance of a company over a period of time. If an Annual Report is impressive about the operations and future direction, if the company has made a profit and if a reasonable dividend has been paid, the average investor is typically content in the belief that the company is in good hands.
However, for a fundamental analyst or for that matter any investor, this alone must not be the criterion by which to judge a company. The intelligent investor must read the annual report in depth; he must read between and beyond the lines; he must peep behind the figures and find the truth and only then should he decide whether the company is doing well or not.
The Annual Report is usually broken down into the following specific parts:
1. The Director’s Report
2. The Auditor’sReport
3. The FinancialStatements
4. The Schedules and Notes to the Accounts. Each of these parts has a purpose and a story to tell.
Terminologies one will encounter in a financial statement are as given below:
Prepaid Expenses - All payments are not made when due. Many payments, such as insurance premia, rent and service costs, are made in advance for a period of time which may be 3 months, 6 months, or even a year. The portion of such expenses that relates to the next accounting period are shown as prepaid expenses in the Balance Sheet.
Cash & Bank Balances - Cash in hand in petty cash boxes, safes and balances in bank accounts are shown under this heading in the Balance Sheet.
Loans & Advances - These are loans that have been given to other corporations, individuals and employees and are repayable within a certain period of time. This also includes amounts paid in advance for the supply of goods, materials and services.
Other Current Assets - Other current assets are all amounts due that are recoverable within the next twelve months. These include claims receivable, interest due on investments and the like.
Current Liabilities - Current liabilities are amounts due that are payable within the next twelve months. These also include provisions which are amounts set aside for an expense incurred for which the bill has not been received as yet or whose cost has not been fully estimated.
Creditors - Trade creditors are those to whom the company owes money for raw materials and other articles used in the manufacture of its products. Companies usually purchase these on credit - the credit period depending on the demand for the item, the standing of the company and market practice.
Accrued Expenses - Certain expenses such as interest on bank overdrafts, telephone costs, electricity and overtime are paid after they have been incurred. This is because they fluctuate and it is not possible to either prepay or accurately anticipate these expenses. However, the expense has been incurred. To recognize this the expense incurred is estimated based on past trends and known expenses incurred and accrued on the date of the Balance Sheet.
Provisions - Provisions are amounts set aside from profits for an estimated expense or loss. Certain provisions such as depreciation and provisions for bad debts are deducted from the concerned asset itself. There are others, such as claims that may be payable, for which provisions are made. Other provisions normally seen on balance sheets are those for dividends and taxation.
Sundry Creditors - Any other amounts due are usually clubbed under the all-embracing title of sundry creditors. These include unclaimed dividends and dues payable to third parties.
Terminologies one will encounter in a financial statement are as given below:
Prepaid Expenses - All payments are not made when due. Many payments, such as insurance premia, rent and service costs, are made in advance for a period of time which may be 3 months, 6 months, or even a year. The portion of such expenses that relates to the next accounting period are shown as prepaid expenses in the Balance Sheet.
Cash & Bank Balances - Cash in hand in petty cash boxes, safes and balances in bank accounts are shown under this heading in the Balance Sheet.
Loans & Advances - These are loans that have been given to other corporations, individuals and employees and are repayable within a certain period of time. This also includes amounts paid in advance for the supply of goods, materials and services.
Other Current Assets - Other current assets are all amounts due that are recoverable within the next twelve months. These include claims receivable, interest due on investments and the like.
Current Liabilities - Current liabilities are amounts due that are payable within the next twelve months. These also include provisions which are amounts set aside for an expense incurred for which the bill has not been received as yet or whose cost has not been fully estimated.
Creditors - Trade creditors are those to whom the company owes money for raw materials and other articles used in the manufacture of its products. Companies usually purchase these on credit - the credit period depending on the demand for the item, the standing of the company and market practice.
Accrued Expenses - Certain expenses such as interest on bank overdrafts, telephone costs, electricity and overtime are paid after they have been incurred. This is because they fluctuate and it is not possible to either prepay or accurately anticipate these expenses. However, the expense has been incurred. To recognize this the expense incurred is estimated based on past trends and known expenses incurred and accrued on the date of the Balance Sheet.
Provisions - Provisions are amounts set aside from profits for an estimated expense or loss. Certain provisions such as depreciation and provisions for bad debts are deducted from the concerned asset itself. There are others, such as claims that may be payable, for which provisions are made. Other provisions normally seen on balance sheets are those for dividends and taxation.
Sundry Creditors - Any other amounts due are usually clubbed under the all-embracing title of sundry creditors. These include unclaimed dividends and dues payable to third parties.
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