• About Annual Report

The annual report is a document that a company publishes at the end of every financial year. The company updates an annual report on its website in the form of a PDF document. However, you can contact the company to receive a hard copy of the same.

It contains all the essential and materialistic information about the company, which is verified by the company. The annual report has an auditor’s certificate, which makes it authentic and official. In case you find a misrepresentation of facts in the annual report, you can legally sue the company. The main purpose of releasing a financial statement is to cater to the needs of the shareholders as well as other interested parties such as potential investors etc.

If you are personally planning to invest in a company, you must look at the company’s annual report. One of the most important things you need to keep in mind is the source from where you collect the annual reports. You should always refer to the report published on the official website of the company as it is unaltered, while media websites may follow different criteria.

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• What to read

While doing an Annual report analysis, one must understand now everything is important in the report. You should only look for certain elements which impacts the fundamentals of a company. Since the annual report is a consolidated document presented by the company at year-end with all the information, it may contain things that might not be that useful.

Every individual looks at the annual report with a different mindset. If the information is materialistic or otherwise, would depend on the purpose behind reading the report. Therefore, the same piece of information can either be useful or useless, depending on your purpose. While reading an annual report, you must be cautious, and you should be able to distinguish between facts and marketing strategies.

This misinterpretation of facts can sometimes lead to a chaotic situation and a wrong investment decision. Although every annual report is unique, you will find the following points in almost every report.

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• Financial Highlights

As the name suggests, the financial highlights give you an overview of the company’s performance in the previous year. It is a brief, graphical representation and analysis of the company’s financial statements and other things too. For instance, you might get to see various accounting ratios which are calculated by the company for making comparison easier. But you should not spend a lot of time reading the financial highlights and ratios because later on, you might have to re-calculate the ratios, as per your requirements.

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• The Management Statement

This section of the annual report comprises of the management’s opinion and reviews for the company. If you are planning to invest in a company, you must know what the owners of the company feel about their company. The management statement helps you gain information about the company’s current position from the chairman’s perspective.

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• Management Discussion & Analysis

In this part of the reports, we get to learn about the company’s outlook for macroeconomic policies. Therefore, the management discussion and analysis helps the trader to know about the chairman’s view of the current macroeconomic trends. While going through this section of the annual report, you also get to know how the company is affected by macroeconomic. If the company is involved in imports and exports, the changes in international policies would also be considered.

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• 10 Year Financial Highlights

In this section, you gain information about the company’s overall performance in the previous years. The 10 year financial highlights help you in comparing how the company is performing in comparison to the previous years. Therefore, by reading the 10 year financial highlights, you can also analyze the growth potential of the company. To do this, you need to analyze the trend of performance; an upwards trend indicates that the company is growing year over year and vice versa. Apart from these three, there are other sections too. The below-mentioned sections may be useful to a certain set of audience based on their requirements: Corporate Information, Director’s Report, Report on Corporate governance, Financial Section, and, Notice

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• Schedules of Financial Statements

If you look at the financial statement of any company, you will come across multiple things. Some of those might be easy to understand, and you will grasp them at a glance. But, there are some which might require prior knowledge. For instance, there is a column named Note No., and many people consider it irrelevant.

But it is important to understand that everything mentioned in the financial statements is crucial. The note number is present adjacent to all the heads in the financial statements. In simple words, the note number is used for reference. If you read the values written in a head and you are curious to know more about it, you can refer to the note number.

The note number redirects you to a page that contains detailed information and the calculations used for arriving at the value mentioned under the head. Therefore, the readers can obtain more clarity about the financial statements by referring to the note numbers mentioned.

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• Conclusion

The annual report is one of the most important documents published by a company. As an investor, you should always know about the financials of the company you are going to invest in. For doing this, it is important to read the annual report of the company. It gives you an insight into the company’s performance and covers almost every aspect which can help you in making your investment decision. While investing, one of the most commonly used technique is fundamental analysis.

Fundamental analysis helps the investor in knowing every materialistic detail about the company, and this can be done with the help of an annual report. Moreover, the annual report can be used to differentiate two companies in terms of performance; therefore, if you want to make an investment decision and choose a company out of many, you can compare the annual reports of two companies. This inter-firm comparison will help you in choosing the best company which can offer you substantial returns in the long run.

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• Concept of Balance Sheet

One of the statements from the list of financial statements is the Balance Sheet. We already know that the statement of profit and loss serves the purpose of telling about the profitability of the company.

Balance Sheet Analysis On the other hand, the balance sheet tells us about the company’s assets, liabilities, and Shareholder’s equity. While reading about the Profit and Loss statement, we learned that it is a standalone statement. This means that every year a new profit and loss statement must be made, which is not linked to the statement of the previous year.

This is because the expenses and revenues keep changing every year, which in turn changes the profits. On the other hand, the balance sheet follows a flow basis model. This implies that it includes the financial information of the company right from its inception. Therefore, the profit and loss statement tells us about the company’s profitability. In contrast, the balance sheet tells us about the growth of the company. Balance Sheet Analysis id very important part of fundamental analysis as it helps to determine the performance of any company.

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• Asset

An asset is a resource owned by the company, which adds some economic value to the company. As we are well aware, assets are of two categories, i.e., tangible and intangible.

Tangible assets are the ones that have a physical existence, such as Land, Machinery, etc. On the other hand, intangible assets do not have a physical existence such as goodwill, etc.

In the case of financial statements, the assets are divided into two heads that are current assets and non-current assets. We will learn more about them in the latter half of this article.

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• Liability

It is the obligations taken by the company with the aim of generating economic value in the long run. In simple words, liability can also be termed as the loan taken by the company with an obligation to pay it back.

Some of the most commonly found liabilities in a balance sheet are short-term borrowings, long-term borrowings, etc. Just like the assets, liabilities are also divided into two major heads.

The two types are non-current liabilities and current liabilities. We will learn more about them in the latter half of this article. The typical equation of a balance sheet says that: Assets=Liabilities. This means that the assets owned by the company are always equal to the labilities that it is obligated to pay. This is because whatever the company buys is either through liabilities or Shareholder’s funds.

This implies: Shareholder’s fund= Assets – Liabilities

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• Shareholders Fund

As we discussed above, there are two main sides of a balance sheet i.e., Assets and Liabilities. Some of you might be confused about how Shareholder’s fund is a part of the liabilities as it represents the Shareholder’s wealth. As per the Companies Act 2013, it is stated that the company is an artificial person that is separate from its owners. Therefore, the shareholders of the company are separate from the company.

Thinking from this perspective, we realize that the Shareholder’s fund does not belong to the company as it is owned by the shareholders. Therefore, from the company’s perspective, it is liable to pay back the money to the shareholders. Thus, it is a part of the liabilities.

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• Share Capital

It is the total Capital earned by the company through the issue of shares. To make it simpler, let’s take an example. Imagine a company Z issuing shares for the first time. The face value of a share is 10 rupees, and the company issues 1000 shares. In this case, the amount of 10,000 rupees earned by the company is the share capital of the company. In our company XYZ, the total share capital is 17.081 crores. Supposing, the face value of one share is Rs.10. The total number of shares issued by the company is: Number of shares = Total share capital / Face value of 1 share = 17081000 crore shares

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• Reserves and Surplus

Reserves are the portion of profits set aside for specific purposes. On the other hand, the surplus is the profit earned by the company. In the case of XYZ, the reserves and surplus for the year ended March 31, 2020, is 1345.62 crore rupees. Some of the most common types of reserves are: Capital Reserves: Capital reserve is the amount earmarked by the company for long term projects or other expenses that are anticipated by the company.

Securities Premium Reserve: The premium received over the face value on the issue of shares is transferred to the SPR account. Let the face value of a share be ten, and it is issued at 12. In this case, the extra amount of 2 rupees is the premium, which will be transferred to the SPR account while the remaining goes in Share capital.

General Reserve: The accumulated profits of the company that has not yet been distributed to the shareholders are transferred to General Reserve. There is no restriction on the usage of the General reserve, and the company can even use it as a buffer.

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• Non-Current Liabilities

The long-term obligations are known as non-current liabilities. In the case of companies, the long term means a period of more than 12 months. Therefore, the obligations that the company intends to pay-off after 12 months from the date of the balance sheet will come under non-current liabilities.

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• Long-term Borrowings

It is one of the most crucial items on the liabilities side of the balance sheet. This is because the long-term borrowings or debt represent the amount owed by the company to various sources. Apart from this, the long-term borrowings are used as an element while calculating various ratios. The presence of debt shows the amount that the company has borrowed, but its absence is not always a good sign either.

It is important to analyze the reason for no debt. A company that does not plan to expand or a company that is not able to raise debt through lenders might also have zero debt in its balance sheet. But this is not a healthy indicator. From Profit and loss statement, we learned about finance costs. The finance cost is directly associated with long term borrowings. Therefore, higher debt will increase the finance cost and vice versa.

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• Deferred Tax Liabilities

The amount of tax paid by the company is never the same for every year. Therefore, a company might foresee that it will have to pay a higher tax in the coming years. In this case, the company sets aside a certain part of the profits as deferred tax liability for future obligations. The changes in the amount of tax can be due to the changes in income tax provision or the method of depreciation. If the company charges higher depreciation, the expenses increase; thus, the tax payable reduces.

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• Long term Provisions

The money which is set aside for employee benefits is usually a part of long-term provisions. This might include items like gratuity, leave encashment, provident fund, etc.

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• Current Liabilities

The short-term obligations are known as current liabilities. In the case of companies, the short term means a period of fewer than 12 months. Therefore, the obligations that the company intends to pay-off within 12 months from the date of the balance sheet will come under non-current liabilities.

For example: If you buy an electronic device on EMI, you will pay monthly installments for a year. But if you buy real estate, you might take a loan for ten years or so.

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• Assets

The liabilities side of the balance sheet told us about the company’s obligations and the Shareholder’s funds. The asset side of the balance sheet tells us about the resources owned by the company right from its inception, and the ones added during the business. These assets help in generating revenue for the company because of which they are termed as resources.

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• Fixed Asset

These are the assets which the company owns, not with the intention of converting them into cash. Fixed assets include both tangible and intangible assets like plant & machinery, land, etc. Intangible assets also tend to provide economic benefits over a longer period

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• Cash and Cash Equivalents

Cash and cash equivalents are considered to be the most liquid asset. The cash in hand and the amount at the bank forms the cash part. At the same time, the investments which are highly liquid and can be converted into cash within three months form cash equivalents.

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• Cash Flow from Operating Activities

All the transactions of cash inflow and outflow on account of daily business operation activities, are recorded under this head. Some examples of transactions recorded in this category are:

Sales related income and expenses

Technology up-gradation and depreciation expenses

Hiring and firing expenses

Rent payments

Tax payments

In short, any activity that relates to the day to day core business activities of an organization is categorized under this head.

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• Cash Flow from Investing Activities

All the cash outflows that the company undertakes to reap capital gains at later stages fall under this head.

The cash inflows from such transactions in the future also come under this category. Some examples of transactions recorded in this category are:

Investing in land

Buying fixed assets like property, or intangible assets

Investing in equity shares

Loans received from customers.

Usually, substantial cash inflows and outflows are involved in investing activities.

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• Cash Flow from Financing Activities

All the activities of cash inflows and outflows related to a company’s financial transactions come under this head of the cash flow statement. Some examples of transactions in this category are:

Payments of dividends

Raising debt

Paying off debts

All the transactions which affect the capital account of the company are recorded under this head.

The sum total of all these heads’ cash balances is recorded in the balance sheet as cash and cash equivalents. To arrive at this final figure, the opening balance is also taken into consideration. This can be said as: The cash flow of the company = Net cash flow from operating activities+ Net cash flow from investing activities+ Net cash flow from financing activities

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• Relationship

There is a direct relationship between the cash flows and liabilities, i.e. when liabilities increase, cash flow increases. On the other hand, when liabilities decrease, cash flow declines.

For example, when a company raises new debt, it leads to cash inflow (Recorded under financing activities). At the same time, there is an increase in the liabilities of the company’s balance sheet.

Another example is a payment to creditors. When the payment is made to the company’s creditors, the creditors decrease, indicating a decrease in liability. At the same time, there is a decrease in the cash balance. There is an inverse relationship between assets and cash flow. This means, when the assets increase, cash flow decreases. Similarly, when the assets decrease, cash flow increases.

For example, when a company purchases new equipment, the assets increase. But since the payment is made in cash, the cash balances decrease. Another example is the receipt of payments from debtors. In this transaction, the debtors decrease, indicating a decrease in assets. Whereas, the amount received from debtors increases the cash balance. The above relationship is significant to build an overall understanding of the cash flow statement. By looking at the above explanation, it can also be concluded that any business activity leads to an increase in cash balance or reduces the cash balance. The nature of the activity that is, operating, investing, or financing does not change this basic understanding.

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• Financial Well Being of a Company

A positive balance of the net operating activities indicates financial well-being. This is because, under this head, all day-to-day business activities are recorded. A company that is able to maintain a cash inflow greater than outflow is said to be more efficient.

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• Business Plan for Expansion

A healthy amount of investing activities indicates a business’s plan for expansion. For an investor, this is a good sign to invest in that particular company. It shows that the business is serious towards increasing its scale of operations in the coming time, and hence, the share prices might rise. However, what is a healthy amount of investment would vary from business to business. It is important to remember that investing activities drain a lot of cash, and hence, prudent decision making related to this is essential.

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• Verify Financing Activities

Financing activities need to be verified with the balance sheet. A simple example is that issue of new debt will increase the cash balance, and the net financing activity will be positive. However, the issue of more debt can increase the risk factor. The net equity ratio needs to be maintained. This can only be verified by taking a closer look at the balance sheet of the company. Compare all figures with the previous year for a better understanding. The cash flow statement shows the closing balances of the last year as well. This facilitates easy comparison between the two years. Better conclusions can be drawn by doing so.

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• Reporting of Operating Cash Flow

Companies can use either direct or indirect methods for reporting their operating cash flow. Under the direct method, all cash inflows are recorded at source, and outflows by use. This is most commonly used by small firms who do their accounting on a cash basis rather than an accrual basis. Whereas, under the indirect method, the data is derived from the income statement and balance sheet. The data is recorded in these statements on an accrual basis. In the cash flow statement, the information is recorded based on the change between the years.

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• Financial Ratio

A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders owners of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.

Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%. Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, such as earnings yield, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1, such as P/E ratio; these latter are also called multiples. Given any ratio, one can take its reciprocal; if the ratio was above 1, the reciprocal will be below 1, and conversely. The reciprocal expresses the same information, but may be more understandable: for instance, the earnings yield can be compared with bond yields, while the P/E ratio cannot be: for example, a P/E ratio of 20 corresponds to an earnings yield of 5%.

https://en.wikipedia.org/wiki/Financial_ratio

• What are Financial Ratios?

Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.

Financial ratios are grouped into the following categories:

- Liquidity ratios

- Leverage ratios

- Efficiency ratios-

- Profitability ratios

- Market value ratios

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• Liquidity Ratio

Liquidity ratios demonstrate a company's ability to pay its current obligations. In other words, they relate to the availability of cash and other assets to cover accounts payable, short-term debt, and other liabilities. All small businesses require a certain degree of liquidity in order to pay their bills on time, though start-up and very young companies are often not very liquid. In mature companies, low levels of liquidity can indicate poor management or a need for additional capital. Any company's liquidity may vary due to seasonality, the timing of sales, and the state of the economy. But liquidity ratios can provide small business owners with useful limits to help them regulate borrowing and spending.

https://www.inc.com/encyclopedia/financial-ratios.html

• Leverage Ratio

Leverage ratios look at the extent to which a company has depended upon borrowing to finance its operations. As a result, these ratios are reviewed closely by bankers and investors. Most leverage ratios compare assets or net worth with liabilities. A high leverage ratio may increase a company's exposure to risk and business downturns, but along with this higher risk also comes the potential for higher returns.

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• Efficiency Ratio

By assessing a company's use of credit, inventory, and assets, efficiency ratios can help small business owners and managers conduct business better. These ratios can show how quickly the company is collecting money for its credit sales or how many times inventory turns over in a given time period. This information can help management decide whether the company's credit terms are appropriate and whether its purchasing efforts are handled in an efficient manner.

https://www.inc.com/encyclopedia/financial-ratios.html

• Profitability Ratio

Profitability ratios provide information about management's performance in using the resources of the small business. Many entrepreneurs decide to start their own businesses in order to earn a better return on their money than would be available through a bank or other low-risk investments. If profitability ratios demonstrate that this is not occurring—particularly once a small business has moved beyond the start-up phase—then entrepreneurs for whom a return on their money is the foremost concern may wish to sell the business and reinvest their money elsewhere. However, it is important to note that many factors can influence profitability ratios, including changes in price, volume, or expenses, as well as the purchase of assets or the borrowing of money. Some specific profitability ratios follow, along with the means of calculating them and their meaning to a small business owner or manager.

https://www.inc.com/encyclopedia/financial-ratios.html

• What Are Stock Fundamentals?

We hear the word fundamentals on an almost-daily basis. Analysts, executives, and investors appear on CNBC daily to talk about the fundamentals of a stock. Fund managers are always talking about how this stock or that one has strong fundamentals. There are also some traders who, in turn, proclaim that fundamentals don't actually matter and investors should rely on a stock's technical merits instead. But what exactly are they? Read on to find out some of the fundamentals about stock fundamentals.

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• Fundamentals of Stock Fundamentals

In the broadest terms, fundamental analysis involves looking at any data which is expected to impact the price or perceived value of a stock. This is, of course, anything aside from the trading patterns of the stock itself, As the name implies, it means getting down to basics.

Fundamental analysis focuses on creating a portrait of a company, identifying the fundamental value of its shares, and buying or selling the stock based on that information. Some of the indicators commonly used to assess company fundamentals include: Cash flow, Return on assets, Conservative gearing, History of profit retention for funding future growth, The soundness of capital management for the maximization of shareholder earnings and returns

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• The Fundamental Approach

Fundamental analysts have a staid approach to analyzing stock performance. They look at a variety of factors that they believe influence a stock's performance. These include the industry as a whole, the competition, a company's management structure, its income and revenue, as well as its growth potential. All of the data is public and readily available, generally through a company's financial statements. The goal is to ultimately identify which stocks are priced correctly—and incorrectly— by the market.

To help you visualize it, let's use the following analogy. Think of the stock market as a shopping mall, where stocks are the items for sale in the retail outlets. Their sights are set solely on the products in the mall. Shoppers are dismissed as an unreliable, emotional herd with no inkling of the real value of the goods for sale. Fundamental analysts move slowly through the stores seeking the best deals. Once the crowd moves on from, say, the personal computers (PCs), they will take a closer look at the ones that were passed over.

Fundamental analysts may take a stab at determining the scrap value of the PC stripped down to its hard disk, memory cards, monitor, and keyboard. In the stock market, this is akin to calculating the book value, or liquidation price, of a company. These analysts also take a very close look at the quality of the PC. Is it going to last or will it break down within a year? The fundamental analysts will pore over the specifications, scrutinize the manufacturer's warranty, and consult consumer reports. Similarly, equity analysts check a company's balance sheet for financial stability.

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• Good Fundamentals Don't Equal Profits

Performing fundamental analysis can be a lot of hard work. But that is, arguably, the source of its appeal. By taking the trouble to dig into a company's financial statements and assessing its future prospects, investors can learn enough to know when the stock price is wrong. These conscientious investors are able to spot the market's mistakes and make themselves money. At the same time, buying companies based on intrinsic, long-term value protects investors from the dangers of day-to-day market fluctuations.

However, the fact that fundamental analysis shows that a stock is undervalued does not guarantee it will trade at its intrinsic value any time soon. Things are not so simple. In reality, real share price behavior relentlessly calls into question almost every stock holding, and even the most independently minded investor can start doubting the merits of fundamental analysis. There is no magic formula for figuring out intrinsic value.

Just because fundamental analysis shows that a stock is undervalued doesn't guarantee it will trade at its intrinsic value in the near future.

When the stock market is booming, it is easy for investors to fool themselves into thinking they have a knack for picking winners. But when the market falls and the outlook is uncertain, investors cannot rely on luck. They actually need to know what they're doing.

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• What Is Fundamental Analysis?

Fundamental analysis is the process of examining all of a company’s fundamentals, both quantitative and qualitative, to determine the “real” or intrinsic value of a stock. This value can then be compared to the price the stock is currently trading at to make strategic investment decisions.

https://www.thestreet.com/dictionary/f/fundamentals

• What Is Fundamental Analysis Used For?

Investors and institutions often use fundamental analysis to get a more accurate picture of a company’s intrinsic value. Here, intrinsic value refers to the “true” worth of a company (rather than its market value) based on the many factors that contribute to its health and success.

Investors who prefer fundamental analysis to technical analysis believe that the price of a company’s stock isn’t always an accurate gauge of the company’s value. By conducting fundamental analysis, an investor can identify a stock they believe is undervalued by the market and choose to invest in it with the hope that it will rise in price in the long term as the company’s value becomes apparent to the market over time. Similarly, an investor could choose to sell a stock they’ve been holding that has gone up in price because fundamental analysis tells them that it is now overvalued by the market.

https://www.thestreet.com/dictionary/f/fundamentals

• What Are the Quantitative Components ?

Many important fundamentals are publicly available quantitative metrics that can be compared between stocks within an industry. (Comparing quantitative fundamentals between stocks in different industries provides less insight, as different industries have different norms.) Below are some of the most common quantitative metrics used in fundamental analysis.

https://www.thestreet.com/dictionary/f/fundamentals

• The Role

The role of Fundamental Analysis in Trading is highly important. It is undoubtedly the best possible way to find out the real worth of any stock.

The role of Fundamental Analysis for Investment is basically to find out the intrinsic value of the stock based on the quantitative and qualitative sources of information.

This intrinsic value is required to compare with the current market price of the stock and take decision for investment.

So, if the market price is above the intrinsic value, the investor should sell or short the stock as the price in the long term is going to fall as the stock is overvalued and vice versa.

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• Economic Analysis or Forecast

In the top-down process, the first step is always the evaluation of the economy in general. There are multiple sectors and industries with hundreds of companies in them which builds an economy in general.

This needs to be analyzed closely to begin fundamental research. The growth in the economy directly affects the growth of companies and their stocks in general with some exceptions.

There is a direct link of the interest rates prevailing in the economy with the stock market and bond markets.

So, it is highly important that you take note of the crucial aspects of the economy and then dig deeper into it.

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• Industry or Sector Analysis

After economic analysis, you need to get down to a few or one specific industry which seems more promising than the others in your analysis. It can be done by comparing the growth of certain industries that you prefer or as per your analysis.

In a growing economy, certain industries will bring more profits than others. To choose the specific industry for your investment purpose, you need to check the industry’s overall growth potential in the upcoming years.

How the industry is affecting the economy or its importance to the economy. Then you need to see the market strength or a number of companies in that industry and similar aspects.

Apart from these, you need to check the prospects of the industry as well. Innovations and technologies involved and getting developed in the industry.

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• Company Analysis

Finally, you come down to company analysis post industry analysis. Now you have analyzed the economy, chosen an industry. Now you have to choose a company and its stock for investment from the industry you have selected.

For selecting a company out of the industry, the first step is to shortlist a few of them. You need to shortlist the companies on the basis of –

Its prospects in terms of technology and innovation, Its marketing standards, Whether it has an edge over other companies or not?, Market share, Financials, Brand value, etc

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• Analysis of the Business Plan

So, to begin with, you need to completely understand and observe the business plan of the company.

Every business has a plan for its prospects and growth projections. If not then you know what to do. So, check the business plan thoroughly. Whether the business is demanding or not? Is it profitable or not? It is feasible or not? These questions need to be asked while choosing a new company. For any established company, you need to know whether the company’s future goals are determined and defined or not in the business plan? Whether it is a leader in the industry or not and similar questions which would help you verify the business plan of the company.

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• Financials Of The Company

After analyzing the management and its decision of the company, you need to check the financials which is one of the crucial parts of this research.

For financial analysis, you need to check the financial statements – profit and loss statement, balance sheet, cash flow statement along with other documents.

You need to find out the financial ratios to check their credibility, liquidity, and other aspects. Using financial analysis, you can derive the intrinsic value of the stock of the company. If you found the intrinsic value of the stock to be above the current market price, then the stock is undervalued in the market. This is the scope of investment. You can buy the share at this point as the market is going to boost the share’s price eventually with time.

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• Profit & Loss Statement

Know everything about Profit & Loss Statement & its Analysis here. The Income Statement is an important past of Fundamental Analysis which we will discuss here. Lets have a detailed understanding of Profit & Loss or Income Statement here.

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• About Profit & Loss Statement

The financial statements broadly include three reports: Statement of Profit and loss, Balance Sheet, and Cash Flow Statement. Our other article shows how financial statements are crucial for making an investment decision. In case you do not know, financial statements are a record of the organization’s financial activities throughout the year. With the help of financial statements, we can analyze the current situation of the company and its growth prospects.

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• The Makers Perspective

The maker of the financial statements is someone who has an in-depth knowledge of accounting and finance. The maker cannot directly arrive at the financial statements as there is a process that needs to be followed. Therefore, the maker needs to prepare journals, ledgers, match the bills and receipts, etc. The basic objective of following the entire process is to make the financial statements that represent the true picture of the company, in the most transparent manner possible.

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• The Users Perspective

The user of a financial statement is the person who reads it for various purposes such as investing, analysis, etc. While the maker of the financial statements is expected to have the in-depth technical knowledge, the user is not expected to have the same. The user is only expected to have enough knowledge to read and analyze the financial statements properly.

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• Introduction

As the name suggests, this report tells us about the net earnings of the company. A positive value depicts profits, while a negative value depicts losses.

The four major heads in a profit and loss statement are: Revenue of the company during the given year, The expenses incurred by the company for generating the Revenue, Tax paid during the year and depreciation charged, The earning per share or EPS, etc.

However, before arriving at the list of heads, you need to know about the various columns and headers present in a statement of Profit and loss.

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• Income statement

An income statement or profit and loss account also referred to as a profit and loss statement (P&L), statement of profit or loss, revenue statement, statement of financial performance, earnings statement, statement of earnings, operating statement, or statement of operations is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.

It indicates how the revenues (also known as the “top line”) are transformed into the net income or net profit (the result after all revenues and expenses have been accounted for). The purpose of the income statement is to show managers and investors whether the company made money (profit) or lost money (loss) during the period being reported. An income statement represents a period of time (as does the cash flow statement). This contrasts with the balance sheet, which represents a single moment in time.

Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the statement of activities. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended. Income statement is useless.

The income statement can be prepared in one of two methods. The Single Step income statement totals revenues and subtracts expenses to find the bottom line. The Multi-Step income statement takes several steps to find the bottom line: starting with the gross profit, then calculating operating expenses. Then when deducted from the gross profit, yields income from operations.

https://en.wikipedia.org/wiki/Income_statement

• Depreciation and Amortization

The statement of comprehensive income should include:[5] (IAS 1.82)

Revenue

Finance costs (including interest expenses)

Share of the profit or loss of associates and joint ventures accounted for using the equity method

Tax expense

A single amount comprising the total of (1) the post-tax profit or loss of discontinued operations and (2) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation

Profit or loss

Each component of other comprehensive income classified by nature

Share of the other comprehensive income of associates and joint ventures accounted for using the equity method

Total comprehensive income

The following items must also be disclosed in the statement of comprehensive income as allocations for the period: (IAS 1.83)

Profit or loss for the period attributable to non-controlling interests and owners of the parent

Total comprehensive income attributable to non-controlling interests and owners of the parent

No items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as extraordinary items.

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• Key Points

The expense part of the statement of Profit and loss tells us about the list of expenses incurred in a year.

Each item in the profit and loss statement can be explained further with the help of notes to accounts.

Finance cost includes expenses such as interest paid etc. The company incurs finance cost when it borrows money to manage capital expenditure etc.

Depreciation and Amortization are done to represent the true picture of a business. Through this, the company aims at spreading the cost of a particular asset over its life, as we did in the case of XYZ.

Profit before tax = Total Revenue earned – Total expenses incurred – Exceptional items.

Net Profit after tax = Profit before tax – Current Tax – Deferred Tax

Earning per share or EPS tells us about the earning capacity of a company based upon a share of the company. In simple words, EPS gives information about the income earned per face value of a share. It is important to note, earning refer to the net Profit after excluding tax and preferred dividends.

The formula to calculate EPS is: EPS = Net Profit after tax / Number of outstanding shares

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