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 1

Let’s start with the two popular styles followed by investors to invest in the stock market. They namely are:

• Fundamental  analysis
• Chart Analysis

Some investors choose to analyze a stock using only one of the above, but according to me you need both of the  above mentioned skills to get a clear picture.

Fundamental Analysis

Fundamental analysis basically refers to analyzing the financials, performance. In lay man’s terms this means that you are finding out how the company has been performing, has it been making a loss or a profit, is the company in too much debt, is the company utilizing its money and the most important one-“Is the company growing”. You can find out all of this by looking at the financials of the company. The most important parts of a company’s financials are:

• Balance Sheet
• Profit and Loss Account[P&L]
• Cash Flow
• Quarterly Results

These are the basic financials of the company one must analyze before investing in it. I’ll be explaining more about this in my next post.

Chart Analysis

Now as we all know that the financials of the company aren’t all that need to be analyzed. The movement of a stock on the stock market is also because of investor sentiment. This is a big factor in the stock market; investor sentiment plays a major factor on the direction of a particular stock. We can judge investor sentiment to a certain extent using the charts of the basic stocks. The Basic tools we must familiarize ourselves with in order to successfully analyze stocks are:

• Moving Averages [Simple and exponential]
• Volume
• Trendlines
• Chaikin Money Flow
• OHLC Chart type
• Gaps and Basic Chart Patterns

As we familiarize ourselves with this we will delve deeper into chart analysis and learn more complicated stuff.

For now this will be all, my next post will explain Fundamental analysis more clearly. Till then I want every one of you to get to know the site www.moneycontrol.com, create an account and a portfolio because trust me while you learn stock market investing, this site will be your best friend.