Deciphering the Balance Sheet

Deciphering the Balance Sheet

Earlier I had talked about the technical aspect of the balance sheet or its physical appearance. In this chapter I am going to teach you how you actually analyze the data present on the balance sheet. Our fundamental aim of analyzing a company’s balance sheet is to find out whether it has strong fundamentals and a good balance sheet or whether it has a weak balance sheet. A company must have a good balance sheet to perform well.

As I had earlier given the example of the balance sheet of Infosys we will analyze that balance sheet.

Balance Sheet of Infosys

------------------- in Rs. Cr. -------------------

	Mar '11	Mar '10	Mar '09	Mar '08	Mar '07
	12 mths	12 mths	12 mths	12 mths	12 mths
Sources Of Funds
Total Share Capital	287.00	287.00	286.00	286.00	286.00
Equity Share Capital	287.00	287.00	286.00	286.00	286.00
Share Application Money	0.00	0.00	0.00	0.00	0.00
Preference Share Capital	0.00	0.00	0.00	0.00	0.00
Reserves	24,214.00	21,749.00	17,523.00	13,204.00	10,876.00
Revaluation Reserves	0.00	0.00	0.00	0.00	0.00
Networth	24,501.00	22,036.00	17,809.00	13,490.00	11,162.00
Secured Loans	0.00	0.00	0.00	0.00	0.00
Unsecured Loans	0.00	0.00	0.00	0.00	0.00
Total Debt	0.00	0.00	0.00	0.00	0.00
Total Liabilities	24,501.00	22,036.00	17,809.00	13,490.00	11,162.00
	Mar '11	Mar '10	Mar '09	Mar '08	Mar '07
	12 mths	12 mths	12 mths	12 mths	12 mths
Application Of Funds
Gross Block	6,934.00	6,357.00	5,986.00	4,508.00	3,889.00
Less: Accum. Depreciation	2,878.00	2,578.00	2,187.00	1,837.00	1,739.00
Net Block	4,056.00	3,779.00	3,799.00	2,671.00	2,150.00
Capital Work in Progress	499.00	409.00	615.00	1,260.00	957.00
Investments	1,325.00	4,636.00	1,005.00	964.00	839.00
Inventories	0.00	0.00	0.00	0.00	0.00
Sundry Debtors	4,212.00	3,244.00	3,390.00	3,093.00	2,292.00
Cash and Bank Balance	641.00	929.00	805.00	657.00	680.00
Total Current Assets	4,853.00	4,173.00	4,195.00	3,750.00	2,972.00
Loans and Advances	5,273.00	4,201.00	3,303.00	2,804.00	1,241.00
Fixed Deposits	13,024.00	8,868.00	8,234.00	5,772.00	4,827.00
Total CA, Loans & Advances	23,150.00	17,242.00	15,732.00	12,326.00	9,040.00
Deffered Credit	0.00	0.00	0.00	0.00	0.00
Current Liabilities	2,056.00	1,995.00	1,544.00	1,483.00	1,162.00
Provisions	2,473.00	2,035.00	1,798.00	2,248.00	662.00
Total CL & Provisions	4,529.00	4,030.00	3,342.00	3,731.00	1,824.00
Net Current Assets	18,621.00	13,212.00	12,390.00	8,595.00	7,216.00
Miscellaneous Expenses	0.00	0.00	0.00	0.00	0.00
Total Assets	24,501.00	22,036.00	17,809.00	13,490.00	11,162.00
Contingent Liabilities	1,013.00	295.00	347.00	603.00	670.00
Book Value (Rs)	426.73	384.02	310.90	235.84	195.41

Above is the overview of the balance sheet of Infosys

Total Share Capital- We see that the company has an equity share capital of Rs 286 Cr. in the financial years ’06-’07, ’07-’08 and ’08-’09. In the year ’09-’10 the company’s share capital increased by a nominal amount due to a slight dilution in equity.

Preference share Capital- As we see that Infosys does not have any preference shareholders (In lay man terms this is like the first class of an airplane). This does not give us any signal but companies with large number of preference shareholders are not that good, more on this later.

Reserves-As we see continuously the reserves of this company have been increasing. The reserves have never decreased even for a single year. This means the company is growing positively and expanding. This is one important part we should see in a balance sheet as it is an indicator to the positive growth.

Networth- As we see above that the networth has been continuously increasing in the last 5 years but the rate of increase has decreased in the last two years. This is clearly indicative of the economic growth slump that we are facing.

Secured and Unsecured Loans- Infosys is a debt free company. This means it has not taken any debt and this is a very good and positive sign. The main reason for this is that the company does not owe any one (except the shareholders) and hence it does not have any interest payments to make.

Net block-An increase in Net Block indicates that the Company is continuing to Invest in building assets which will help the Company perform better in future years. Funding of Fixed Assets from Reserves indicates a mature and positive governance approach where-in the management believes that the company has a bright future and hence invests in fixed assets.

Investments-Compared yOy (year on year) basis the investments have drastically decreased, this further reinforces the notion that the growth of the company has slowed down and decreased.

Sundry Debtors and Inventories-This Company being in IT does not hold inventories but its sundry debtors have increased from 3200 to 4200 crores. That’s almost a 30% increase.An increase in this reflects a cash pressure in the economy and this has occurred because the company has not received the payment for its products. 

Current Assets-The total current assets have increased, the rate of increase is around 12%. This is better than last year so it shows the company would have acquired liquid assets which could include trade investments, debtors, cash etc.

Fixed Deposits- There has been a phenomenal increase in the fixed deposits yOy, around 50%. This could mean a lot of things but one of the important things that become clear is that the company is taking a conservative approach and instead of risky investments the company prefers to park its money in a fixed deposit and receive a lower rate of return.

Current Liabilities- There is a nominal increase in the current liabilities and is not of considerable importance in these circumstances.

Total assets-The total assets increase rate has decreased yOy but it is not alarming as we already have an idea of the company growth slowing and the economy of the world is also in turmoil.

Book Value- As we see the book value of the company has been continuously increasing albeit not at the same rate but that is understandable. As we saw above that the book value of the company is just Rs 426.73 but the company is currently trading Rs 2750.80. This means that the company is trading at a premium which in turn means that people are willing to more to buy a share of the company. Its Price to book value is given by 6.45.

Similarly a company could be undervalued if its trading price is lower than its book value. Now an undervalued company with a good balance sheet is called an underdog and these are the ones that usually give returns in excess of 25%. This will require some hard work to find.

So basically once we find out whether a company has a good balance sheet or not half our work is done because a good balance sheet also indicates whether that the company could pull through the problems it is currently facing.

Now that you know how to analyze the balance sheets take out 30 minutes in a day go to www.moneycontrol.com pick a random company of your choice and check out the company’s balance sheet.

If you have not understood any part please let me know by commenting or writing on our facebook page https://www.facebook.com/pages/Minerva-M/248048115242411

You could also post the link of the balance sheets you are having trouble analyzing and I will help you out.

You officially now begin your journey of Investing in the Stock market.

Cheers,

Shail.

Understanding the Beast- Chapter 2

Fundamental Analysis

I hope all of you must have familiarized yourself with the moneycontrol.com. Now let us get started with the most basic part of Fundamental Analysis. As I had earlier mentioned the financials of a company consists of balance sheet, cash flows etc. We will tackle each of these financials separately

Let us get started with the balance sheet of a company first.

What is a Balance Sheet?

A balance sheet is fundamentally a sheet showing the assets and liabilities of the company as on a particular date. The balance sheet is prepared on the last date of the financial or calendar year, whichever followed by the company (Try recollecting the definition of an asset and a liability).Now it cannot be so simple otherwise everyone would understand it right? So companies include complicated terms to make it confusing. I will try making it as simple as I can.

This is the link to the balance sheet of the company Infosys
http://www.moneycontrol.com/financials/infosys/balance-sheet/IT
Now I will be explaining the most fundamental terms, we will get to the technical terms later.

·        Equity Share Capital- This refers to sum total of all the money that was raised by issuing shares. This means that when the company issues shares, the money it receives comes under this category.

·        Reserves-This means the amount of money (not necessarily liquid) that the company has from the previous years.

·        Networth-This is basically the total value of the company.

·        Secured and Unsecured loans- Secured loans are those in which money is lent against a collateral while unsecured loans are those in which money is lent on the promise of returning the money. In Unsecured loans as the loan is given against a promise of paying the rate of interest is higher than the Secured loans.

·        Total liabilities- This is the sum total of all the money that the company owes. This is always numerically equal to the Total Assets. (Because money cannot be destroyed)

·        Net Block-This refers to Current value of the fixed assets. This basically is the resale/salvage value of the assets owned by the company.

·        Sundry Debtors- These are the ordinary customers of the company who  have taken goods on credit. This basically means that the goods have been delivered by the company to these people but the company is yet to receive payment for their goods.

·        Inventories- These refer to those goods of the company that haven’t been sold yet but the company is stocking them to sell at a later date.

·        Current Assets- This term basically refers to the liquid assets of the company. This means that if the company was to dissolve or go broke and they could sell these assets and get money. This would refer to the fixed deposits and money in the bank etc. It is actually a superset of liquid assets and includes all the assets other than fixed assets.

·        Net current assets- This basically is Current Assets-Current Liabilities. This means that it is the balance left if all the current assets were used to take care of the current liabilities. 

·        Total Assets- It is the total value of all the assets held by the company

·        Book Value- This basically means that because of the balance sheet the value of the company should be that much. This does not mean it is the ideal price of the company it just gives us an indication on the company’s performance year on year as well as versus other peers.

These are the basic terms of the balance sheet. If you have a problem understanding any term please provide a feedback I will explain it again or in more detail.

Cheers,

Shail