What is the Tool to Measure Relative Changes in Financial Statements

Dear Friend!

Simple MS Excel is the best tool to measure relative changes in the item heads in financial statements. I use this tool regularly and quite effectively.

You have to physically enter the financial data for many years as columns and data items/ heads as rows. Then you can perform absolute changes and percentage changes quite easily.

After the data is ready, you can use many powerful features of MS Excel like “IF” function, “Conditional Formatting” to highlight results in the most useful and visually powerful forms.

Please see the example Excel Sheet containing NMDC’s operating results for various years, below. By using conditional formatting, the EBT% figures are highlighted in the following ways:

1.     If EBT% is below 50% the cell is filled with light pink and fonts are in dark red.

2.     If EBT% is above 50% but below 75% the cells are highlighted in light green and the font colour is black.

3.     If EBT% is above 75% the cells are highlighted in dark green and the font colour is white.

I hope you will use the MS Excel and also master a few powerful techniques they possess.

Thank you,

With Best Regards

Anand

How Can I Analyse the Financials of a Company?

Picture depicts the concept of financial analysis

Dear Friend!

Thank you very much for the thought-provoking question. But the answer is very difficult as financial analysis is a vast subject.

Still I will try my best to answer your question.

The financial statements form the basis of financial analysis of a company and there are three key financial statements as follows:

1.     Balance Sheet

2.     Profit and Loss Account

3.     Cash Flow Statement

The balance sheet or the statement of affairs lists the assets and liabilities. From the balance sheet we can derive the strength of the company to meet its liabilities and obligations through three short-term liquidity and long-term solvency ratios as follows:

1.     Current Ratio

2.     Debt-Equity Ratio

3.     Total Outside Liabilities/ Tangible Net Worth (TOL/ TNW) Ratio

The profit and loss account explains how the changes in the balance sheet between two dates have taken place. It throws light on the profitability of the operations of the company. Following are the key profitability ratios that can be derived from the study of the profit and loss account:

1.     EBDITA

2.     EBT

3.     PAT

The cash flow statement is a very important but often neglected financial statement. Cash generated from the operations after meeting the increase in inventory, receivable and other current assets, called free cash flows is especially important. Many companies show consistent profits but those profits are not sufficient to meet the working capital requirements and are forced to borrow which in turn erodes future profitability and the company is trapped in a vicious cycle negative operating cash flows and borrowing to bridge the gap.

Suggested Further Reading:

On this blog a number of articles and financial analysis reports of Indian companies listed on the stock exchanges are available:

• What Is Financial Statement Analysis?
• What are Good Books for Analysis of Financial Statements?
• For reading: Research Reports and
• For download in pdf format: Free Downloads

I suggest you study a few and you will get practical experience.

Thank you,

With Warm Regards

Anand

What Are Standalone and Consolidated Financial Statements?

In an advanced and globalised economic and financial world of today, it is quite common for large corporations to have many subsidiaries. When one company owns more than 51% of equity share capital in another company, the latter becomes the subsidiary of the former. The former company is called the parent or holding company. It is quite possible that the parent may hold 100% equity of its subsidiary, when it is called a 100% Subsidiary.

Both the holding and subsidiary have their own businesses and draw-up their own financial statements. The financial statements of the holding company, where the shares in the subsidiary are shown as long term investments and the dividend received as other income, are called standalone financial statements as they merely focus on it’s own, independent business activities.

Example:

Standalone Profit and Loss Account for the Year Ended 31st March 2016
Rs. In Crores	Holding Co. Pvt. Ltd.	100% Subsidiary Co. Pvt. Ltd.
Revenues:
Sales Revenue	5250	1250
Other Income	0	50
Dividend Received from Subsidiary Co. Pvt. Ltd.	220	0
Total Revenue	5470	1300
Expenses:
Materials Consumed	4230	630
Other Expenses	176	40
Total Expenses	4406	670
Profit Before Tax	1064	630
Corporate Income Tax	436	164
Profit After Tax	628	466
Dividend	0	220
Balance carried forward to the Balance Sheet	628	246

Standalone Balance Sheet as on 31st March 2016
Rs. In Crores	Holding Co. Pvt. Ltd.	100% Subsidiary Co. Pvt. Ltd.
Liabilities:
Equity Capital	1000
Reserves and Surplus	720	246
Long Term Borrowings	0	0
Current Liabilities & Provisions	80	44
Total Liabilities	1800	560
Assets:
Fixed Assets (Net Block)	830	330
Long Term Investments in Subsidiary Co. Pvt. Ltd.	270	0
Current Assets	700	230
Total Assets	1800	560

The law also requires the the parent company to consolidate or merge, item by item, all components of the financial statements of the holding and subsidiary companies into a single financial statement, which is called the ‘Consolidated Financial Statement’. While preparing the consolidated financial statements, in the profit and loss account the dividend paid and received sums are knocked off. Similarly in the balance sheet the long-term investment in the subsidiary is knocked of against the share capital of the subsidiary. The final ‘Consolidated Financial Statements will appear as follows:

Profit and Loss Account for the Year Ended 31st March 2016	Standalone Holding Co. Pvt. Ltd.	Standalone 100% Subsidiary Co. Pvt. Ltd.	Consolidated Holding Co. Pvt. Ltd.
Rs. In Crores
Revenues:
Sales Revenue	5250	1250	6500
Other Income		50	50
Dividend Received from Subsidiary Co. Pvt. Ltd.	220	0	0
Total Revenue	5470	1300	6550
Expenses:
Materials Consumed	4230	630	4860
Other Expenses	176	40	216
Total Expenses	4406	670	5076
			0
Profit Before Tax	1064	630	1474
Corporate Income Tax	436	164	600
Profit After Tax	628	466	874
Dividend	0	220	0
Balance carried forward to the Balance Sheet	628	246	874

Please observe how the dividends paid and received are knocked off during consolidation.

Balance Sheet 31st March 2016	Standalone Holding Co. Pvt. Ltd.	Standalone 100% Subsidiary Co. Pvt. Ltd.	Consolidated Holding Co. Pvt. Ltd.
Rs. In Crores
Liabilities:
Equity Capital	1000	270	1000
Reserves and Surplus	720	246	966
Long Term Borrowings	0	0
Current Liabilities & Provisions	80	44	124
Total Liabilities	1800	560	2090
Assets:
Fixed Assets (Net Block)	830	330	1160
Long Term Investments in Subsidiary Co. Pvt. Ltd.	270	0	0
Current Assets	700	230	930
Total Assets	1800	560	2090

Please note how the equity capital of the subsidiary Rs.270 crores is set off against long-term investments in the holding company.

Conclusion:

Standalone financial statements reflect the affairs of the holding and subsidiary companies on an independent or standalone basis while the consolidated financial statements merge the figures and carryout necessary adjustments to present the whole and consolidated picture.