Section | Title | Description |
---|---|---|
8.1 | Introduction to Financial Statement | Explains the components and purpose of financial statements. |
8.2 | Stand-alone and Consolidated Financial Statements | Difference between company-only and group-level reporting. |
8.3 | Balance Sheet | Analyzes assets, liabilities, and net worth at a specific point in time. |
8.4 | Basics of Profit and Loss Account (P&L) | Tracks revenues, expenses, and net profit over a period. |
8.5 | Statement of Changes in Shareholders’ Equity | Shows changes in capital, reserves, and retained earnings. |
8.6 | Basics of Cash Flows | Evaluates cash generated from operations, investing, and financing. |
8.7 | Notes to Accounts | Provides supporting information for understanding financial data. |
8.8 | Important Points to Consider in Financials | Key insights, red flags, and analytical observations from financials. |
8.9 | Reading Audit Reports for Quality of Accounting | Evaluates audit opinion, notes, and transparency of accounting practices. |
8.10 | Financial Statement Analysis Using Ratios | Covers solvency, liquidity, profitability, and efficiency ratios. |
8.11 | Commonly Used Ratios | Highlights frequently used ratios with formulas and purpose. |
8.12 | DuPont Analysis | Decomposes ROE into profitability, efficiency, and leverage components. |
8.13 | Forecasting Using Ratio Analysis | Using past ratios and trends for forward financial projections. |
8.14 | Peer Comparison | Compares financial and valuation metrics across competitors. |
8.15 | Other Aspects in Financial Reports | Miscellaneous insights such as segment reporting, related party disclosures. |
Financial statements are structured reports that provide a clear picture of a company’s financial performance and position. They help stakeholders — including investors, analysts, lenders, and regulators — understand how a company earns revenue, manages expenses, deploys capital, and meets its financial obligations.
A company may operate through multiple subsidiaries, joint ventures, or associate firms. To reflect the complete financial position, companies prepare two types of statements:
Insight: Over 29% of TCS’s total revenue comes from its international subsidiaries. Relying only on standalone numbers can significantly understate the company’s size and performance.
The balance sheet provides a snapshot of a company’s financial position at a specific point in time. It shows what the company owns (assets), what it owes (liabilities), and the residual value for shareholders (equity). The fundamental formula is:
Assets = Liabilities + Shareholders’ Equity
Cash, trade receivables, inventory, and short-term investments.
Example: ₹8,000 Cr in cash & bank balance with Infosys.
Property, plant & equipment, goodwill, long-term investments.
Example: Tata Steel’s factories under PPE.
Trade payables, short-term borrowings, and other dues due within 1 year.
Example: Vendor bills unpaid by HUL.
Long-term borrowings, lease liabilities, deferred tax liabilities.
Example: Long-term bonds issued by NTPC.
Equity share capital + reserves and surplus.
Example: ₹30,000 Cr equity in Reliance Industries.
These metrics help assess liquidity, leverage, and capital strength.
Formula: Current Assets / Current Liabilities
Ideal: >1.5
Use: Measures short-term liquidity.
Formula: Total Debt / Equity
Ideal: < 1 for non-capex-heavy sectors.
Use: Shows leverage risk.
Formula: Share Capital + Reserves – Accumulated Losses
Use: Indicates book value of shareholders’ interest.
Formula: Equity + Long-term Debt
Use: Helps assess returns (ROCE).
The balance sheet is a financial snapshot that reflects what a company owns 🟢(Assets), what it owes 🔴(Liabilities), and the residual value for shareholders 🟢(Equity). It follows the equation:
Assets = Liabilities + Shareholders’ Equity
These metrics help evaluate financial strength, solvency, and liquidity:
Formula: Current Assets / Current Liabilities
Example: 2.1 for Nestlé India — indicates strong liquidity.
Formula: (Current Assets – Inventory) / Current Liabilities
Use: Measures true short-term solvency.
Formula: Total Debt / Shareholders’ Equity
Example: 0.3 for Infosys vs 1.9 for Adani Power — shows leverage gap.
Formula: Equity Capital + Reserves
Purpose: Reflects the book value of shareholders’ ownership.
Formula: Equity + Non-Current Debt
Used For: ROCE analysis.
Formula: Current Assets – Current Liabilities
Use: Indicates short-term financial buffer.
Line Item | FY23 | FY22 | FY21 |
---|---|---|---|
🟩 Assets | |||
Cash & Cash Equivalents | |||
Trade Receivables | |||
Inventories | |||
Short-Term Investments | |||
Other Current Assets | |||
Property, Plant & Equipment (PPE) | |||
Capital Work-in-Progress (CWIP) | |||
Goodwill / Intangibles | |||
Long-Term Investments | |||
Deferred Tax Assets | |||
🟥 Liabilities | |||
Trade Payables | |||
Short-Term Borrowings | |||
Current Maturities of Long-Term Debt | |||
Statutory Dues / Other Current Liabilities | |||
Long-Term Borrowings | |||
Lease Liabilities | |||
Deferred Tax Liabilities | |||
Provisions (Short/Long-Term) | |||
🟩 Shareholders’ Equity | |||
Equity Share Capital | |||
Reserves & Surplus | |||
Non-Controlling Interest (Consolidated) | |||
📐 Balance Sheet Ratios | |||
Current Ratio | |||
Quick Ratio | |||
Debt to Equity Ratio | |||
Net Worth | |||
Capital Employed | |||
Asset Turnover Ratio |
The Profit and Loss (P&L) statement reflects the financial performance of a company over a specific period. It shows whether the company made a profit or incurred a loss by comparing its revenues and expenses.
Total income from operations (product or service sales).
Example: ₹70,000 Cr from IT services (TCS).
Direct cost of input goods used in production.
Goods purchased for direct resale (trading companies).
Adjustment based on inventory increase or depletion.
Salaries, wages, provident fund, bonuses.
Non-cash reduction in value of tangible & intangible assets.
Interest on loans and lease obligations.
Admin, selling, travel, R&D, legal costs.
Share of profits from joint ventures or associates.
One-time gains/losses like asset sales or write-offs.
Includes current tax + deferred tax provision.
Minority interest share in subsidiaries (consolidated).
PAT ÷ Number of Shares. Measures shareholder return.
Unrealized gains/losses on investments, forex, revaluation reserves.
Formula: Revenue – COGS
Indicates core manufacturing margin.
Formula: Earnings before interest, tax, depreciation & amortisation
Shows operational efficiency.
Formula: EBITDA – Depreciation
Profit before financing & tax cost.
Formula: PAT after removing one-offs
Better for comparing operating performance YoY.
Line Item | FY23 | FY22 | FY21 |
---|---|---|---|
🟩 Income | |||
Revenue from Operations | |||
Other Income | |||
Income from Equity Accounted Entities | |||
Exceptional / Non-Recurring Items | |||
🟥 Expenses | |||
Cost of Raw Materials | |||
Purchase of Stock-in-Trade | |||
Changes in Inventory (WIP + Finished Goods) | |||
Employee Cost | |||
Depreciation and Amortisation | |||
Finance Costs | |||
Other Expenses | |||
🟩 Profit & Tax | |||
Profit Before Tax (PBT) | |||
Tax Expense | |||
Profit After Tax (PAT) | |||
Adjusted PAT (Excluding One-offs) | |||
Profit Allocated to Non-Controlling Interest | |||
🟩 Shareholder Metrics | |||
Earnings Per Share (EPS) | |||
Other Comprehensive Income (OCI) | |||
📐 P&L Ratios | |||
Gross Profit | |||
EBITDA | |||
EBIT | |||
Net Profit Margin |
The Statement of Changes in Shareholders’ Equity (SOCSE) tracks all movements in a company’s equity during a financial year. It explains how the shareholders’ ownership value has changed due to profits, dividends, fresh issues, buybacks, or other items like revaluation gains and OCI.
Assume a company with:
Closing Equity = ₹100 + ₹(400 + 80 – 20) + ₹5 = ₹565 Cr
The Cash Flow Statement shows the actual movement of cash in and out of a business over a specific period. It is divided into three main parts: Operating, Investing, and Financing activities. It helps analysts understand how cash is generated and used across business functions.
This represents cash generated from the company’s core business operations.
Healthy CFO means the company can fund its operations, pay salaries, and handle short-term obligations using cash from its core business.
This reflects cash used in or generated from investments in long-term assets.
Check if investments are strategic (growth focused) or routine maintenance.
This covers cash flows related to borrowing, repayments, and equity capital changes.
Net financing cash flow can indicate capital structure changes — check for recurring equity dilution or heavy debt repayments.
Notes to Accounts are an essential part of financial statements. They provide additional details and disclosures that help users interpret the financials better. These notes ensure transparency, compliance with accounting standards, and allow analysts to assess financial health beyond numbers alone.
These describe the principles, rules, and conventions followed by a company while preparing its financial statements. They ensure consistency and comparability year-on-year.
Example: Infosys follows SLM for depreciation and recognizes revenue when performance obligations are satisfied.
Contingent liabilities are potential obligations that may arise depending on the outcome of future events. These are not recorded in the balance sheet but are disclosed in the notes as they involve uncertainty.
Example: A company may disclose ₹500 Cr of income tax demand under dispute — not yet recorded as a liability.
Financial statements are a foundation for any business analysis. But numbers alone don’t tell the full story — analysts must look deeper into how figures change over time, compare with peers, and identify signs of risk or manipulation. Here are key areas to focus on:
Example: If EBITDA margin drops YoY while revenue rises — investigate rising costs.
Example: Company shows ₹500 Cr profit, but CFO is negative — verify if it’s due to WC changes or accounting tricks.
Tip: Use Current Ratio and Quick Ratio for better clarity on short-term risk.
Example: Compare Tata Motors vs Maruti — one is debt-heavy, the other debt-free.
The audit report is a key document attached to the financial statements. It reflects an independent auditor’s opinion on the fairness, accuracy, and compliance of the company’s accounts with applicable standards. A “clean” audit opinion does not always mean everything is perfect — analysts must still read the report for signs of concern or qualification.
Listed companies must disclose “Key Audit Matters” — complex or subjective areas auditors focused on:
Tip: Review KAMs for high-risk areas — check if similar issues repeat every year.
Satyam (2008): Auditors failed to detect revenue inflation & cash manipulation. Reading audit qualifications could have alerted analysts earlier.
Modern Practice: Infosys and TCS publish detailed KAMs covering risk areas like client billing, project delivery, and tax exposures.
Financial ratios help decode the deeper meaning behind numbers. Whether evaluating profitability, efficiency, leverage, or liquidity, these ratios provide clarity and comparability across time and industry.
Formula: (Revenue – COGS) / Revenue
Use: Measures production profitability.
Formula: EBITDA / Revenue
Use: Evaluates core operating profit.
Formula: PAT / Revenue
Use: Shows how much profit remains after all costs.
Formula: PAT / Shareholders’ Equity
Use: Measures profit earned on capital invested by shareholders.
Formula: EBIT / Capital Employed
Use: Indicates efficiency of total capital usage.
Formula: Total Debt / Shareholders’ Equity
Use: Measures financial risk from borrowed capital.
Formula: EBIT / Finance Costs
Use: Measures ability to pay interest obligations.
Formula: Current Assets / Current Liabilities
Use: Indicates short-term solvency.
Formula: (Current Assets – Inventory) / Current Liabilities
Use: More conservative liquidity test.
Formula: COGS / Avg Inventory
Use: Measures how fast inventory moves.
Formula: Revenue / Total Assets
Use: Measures use of assets to generate sales.
Formula: Revenue / Avg Receivables
Use: Measures collection speed.
DuPont Analysis is a powerful technique to break down Return on Equity (ROE) into three components: profitability, efficiency, and leverage. It allows analysts to understand the true drivers of shareholder returns and evaluate whether high ROE is sustainable or driven by excessive debt.
ROE = Net Profit Margin × Asset Turnover × Equity Multiplier
Shows how much profit is earned per rupee of sales.
Example: TCS PAT margin = 21% (FY23)
Measures how efficiently assets are used to generate revenue.
Example: Reliance = 1.1x
Shows how much of the company’s assets are financed by equity.
Example: High multiplier = high leverage.
Assume a company has:
Step 1: Net Profit Margin = 120 / 1,000 = 12%
Step 2: Asset Turnover = 1,000 / 800 = 1.25x
Step 3: Equity Multiplier = 800 / 400 = 2x
ROE = 12% × 1.25 × 2 = 30%
Ratio analysis isn’t just for reviewing the past — it also helps in forecasting future performance. By using key financial ratios such as margins, asset turnover, growth rates, and return metrics, analysts can project a company’s future revenue, expenses, profits, and capital needs.
Assume:
Forecast for FY24:
Peer comparison helps analysts evaluate a company’s performance relative to its competitors in the same industry. It enables benchmarking of financial metrics, valuation, growth, and efficiency to identify leaders, laggards, and fair value.
Metric | TCS | Infosys | HCL Tech |
---|---|---|---|
Revenue (₹ Cr) | 2,25,458 | 1,46,767 | 1,02,784 |
EBITDA Margin | 25.0% | 21.5% | 22.0% |
Net Profit Margin | 20.8% | 16.0% | 14.2% |
ROE | 47% | 31% | 24% |
P/E Ratio | 29x | 25x | 21x |
EV/EBITDA | 19x | 16x | 14x |
Dividend Payout | 85% | 70% | 60% |
While financial ratios and statements are critical, investors and analysts must also consider additional information provided in annual reports and disclosures. These factors offer deeper insight into the company’s behavior, shareholder returns, and promoter confidence over time.
Analyzing how the company’s equity base has changed helps understand dilution risk and capital structure decisions.
Steady dividend payout and consistent earnings indicate stable operations and cash flow strength.
Corporate actions like stock splits, bonuses, rights issues, and buybacks affect capital structure and investor returns.
Promoter shareholding trends and insider trading activity give important signals about internal confidence.