How to Read a Financial Statement - An Overview

8/8/2019 How to Read a Financial Statement - An Overview

1/19

Mahindra Satyam 2010

How to read a

FINANCIAL STATEMENTan Overview


2/19

2


Associates, Investors, Customers and Society / External entities

Raise the 2 Questions!

How well the

organization is performing?

Where does the

organization stand?

Where do you find these Answers!


3/19

3


Financial Statement and InvestorFact Sheet

Income Statement, Balance Sheet, Cash Flow

Statement, significant accounting policies,notes & schedules to accounts are collectively

known as Financial Statements. Most of the

companies share the critical data points in the

form of a Fact Sheet to the investors

IncomeStatement

Balance Sheet

Cash flow

Statement Investor

Fact sheet


4/19

4


What isan Income Statement ?

Theincomestatement reports thecompanys

revenues,expenses,and net incomeornet loss for theperiod

Profits (orearningsorincome)are the

excessofrevenuesoverexpenses.


5/19

5


Structureofa Income Statement

P/L Items

A Revenue

B Expenditure

- Compensation & Benefits

- Selling , General & Admn. Exps. ( SG&A)

C=A-B EBITDA ( Earnings before Interest, Tax, Depreciation & Amortization)

D Depreciation & Amortization

E=C-D EBIT ( Earnings before Interest and Tax)

F Financial Expenses (Interest)

G Other Income

H=E-F+G EBT/PBT ( Earnings before Tax)

J Tax

K=H-J PAT ( Profit after Tax)

L Dividends

M=K-L Retained Earnings


6/19

6


What isa Balance Sheet?

Threecomponentsof balancesheet

1. Shareholders funds(i.e. what the

owners of the entity own)

Share Capital

Reserve & Surplus

2. Liability (i.e. what the entity owes)

3. Assets (i.e. what the entity owns)

In simple terms a balance sheet

may be defined as a sheet

of balances

It is the snapshot of the financial

status of an organization ata point in time

Assets =

Liabilities +

Stockholders Equity


7/19

7


Fixed assets

Those assets which the company expects to hold longer than a year

Land & Building, Plant & Machinery

Current assetsThose assets which the company expects to convert to cash, sell, orconsume during the next 12 months or within the business's normaloperating cycle if longer than a year

Cash, Accounts receivable, Merchandise inventory, Prepaid expenses

Good will & intangibleassets

These are not in physical form

Trade Marks, Patents , Good Will etc.,

Assets


8/19

8


Equity

The amount invested in the corporation by its owners , comprised

basically of common stock and the retained earnings.

A Current LiabilitiesDebts payable within one year or within the businesss normal operating

cycle if longer than a year

Bonds payable (short term ), Accounts payable, Accrued expenses

payable, Income taxes payable

Borrowings / Long Term Liabilities

Debts not payable within one year or within the businesss normal

operating cycle if longer than a year

Secured Term Loans, Bonds payable, etc.,

Liabilities


9/19

9


What is the Structureofa Balance Sheet

Account Form : LIABILITIES = ASSETS

Report Form : SOURCES OF FUNDS = APPLICATION OF FUNDS

Sourcesof Funds (or) Liabilities

Equity

Share Capital

Reserves & Surplus

Borrowings:

SecuredLoans

Unsecured Loans

Current Liabilities & Provisions

Applicationof Funds (or) Assets

Fixed Assets (Gross less

depreciation)

Investments

Current Assets

Inventory

Receivables

Loans & Advances


10/19

10


What is theperiod ofreference?

Balance Sheet

March 31

2009

Balance Sheet

March 31

2009

Balance Sheet

March 31

2010

Balance Sheet

March 31

2010

Balance Sheet

June 30

2010

Balance Sheet

June 30

2010

IncomeStatementforFY 2010

IncomeStatement

forQ1/FY2011

Time Time


11/19

11


What isa Cash flow Statement?

It reports Companyscash inflowsand outflowsunder3 heads

FROM OPERATING ACTIVITIES

Cash flows from the core operations of the

company

FROM INVESTINGACTIVITIES

Cash flows from the investing activities, namely

purchase/sale of assets, investments, etc.

FROM FINANCING ACTIVITIES

Fresh issue of capital, debentures, or redemptionof pref. capital/debentures or fresh

borrowings/redemption, etc.

This Statement

shows the

effectivenessof theCash Deployment


12/19

12


A typical Cash Flow Cycle forOperating Activities

CUSTOMERS

Collection

Services /

Products

Out

YOUR

BUSINESS VENDORS/EMPLOYEES

Pymt.

Services /

Products

In

Money In Money Out

Anoperationisconsidered efficient ifit generatecash surplus.

Investingactivities demonstrateefficient deployment of thecash surplus.

Financingactivities demonstrate thesourceof borrowing to fund the deficit.


13/19

13


P/L & PL Metricsof Competition

Cost ofRevenue / Direct Cost

Simpleobservation Better GM % in case of TCS/Infosys/CTS could be attributed to :

Higher price realization

Optimal direct cost spend or right resource mix and utilization

Non-linear engagement , optimal FB projects , entry into niche consulting

SG&A is in the range of 10 14% ; while TCS and CTS are out of range, CTS could be

attributed to high cost resources deployed in S&M to win more business

Wipro-IT services and Product business has been picked from segmental reports. Other expenses & taxes are allocated based on revenue ( assumption made for meaning comparison)

Selling & Genl. Admn.cost


14/19

14


P/L & P/L Metricsof Mahindra Satyam forFY10

When we have more detailed P/L we can identify areas for improvement.

However at Project /Customer Level one does have a P/L upto EBDITA level, so we should focus on the same

to improve it at dis-aggregate level

Note: Due to the restatement efforts, there are certain exceptional items in the financial statements.


15/19

15


Headsin Profit & Loss Account

1) Provision for Contingencies: A company can anticipate various claims which

may not be determinable with certainty; hence estimation may be made for

such contingences.

2) Provision forDiminution in the value of investments: A company can assess

the value of its investments in its subsidiaries or other entities. Suchvaluation is done by an external entity and based on their recommendation,

a provision for loss in the value of investments will be made.

3) Prior Period Adjustments: If a company identifies significant transactions

which pertain to earlier accounting period, all such amounts are required to

be disclosed as prior period adjustments. While in the case of US GAAP,companies are required to restate the financials in respective years. Under

Indian GAAP, they need to be disclosed as prior period adjustments in the

year in which they are identified. In the case of Msat, the Honourable

Company Law Board, has given orders to account for such earlier year

transactions as prior period adjustments

Income Statement: The Bottom Line fora Corporation


16/19

16


Income Statement: The Bottom Line for a Corporation

Various Items that appearin the NotesorFinancial Statements

1) Provision for Doubtful Debts: If the company doubts realization of any

receivables from customers, it is required to identify such amounts and make

a provision. If they are finally proved to be not recoverable we need to write

off such receivables. However due to regulatory requirements, we can write

off such debts only after receiving approval from RBI.

2) Percentage Completion Method: Any fixed price project executed by the

company should be evaluated for progress in performance. Revenue for

such contracts can be recognized only to the extent of the progress certified.

This exercise is required to be done on a monthly basis, so as to recognize

revenue correctly at the end of every month.


17/19

17


Income Statement: The Bottom Line for a Corporation

Various Items that appearin the NotesorFinancial Statements

3) Multiple Deliverables: A contract may have multiple commercial/delivery terms

peculiar to such contract e.g. the contract may have a non returnable clause, higher

warranty than usual warranty given, discounts or service credits with varying

conditions, supply of hardware and software either as a sale or in the nature of

deferred payment etc., such peculiarities need to be addressed as per the applicable

accounting standards under Indian GAAP and US GAAP.

4) Unbilled Revenue: Services delivered but not yet invoiced is called unbilled revenue,

it may be pertaining to T&M, efforts delivered but not yet invoiced or partly executed

fixed price contract. They are required to be recognized in the period when the

service is delivered.

5) Unearned Revenue Adjustments: If we raise invoices on customer without deliveringefforts or without confirming the hours in Ontime and push to IMS for invoicing, we

raise advance invoices and will be treated as unearned. Revenue can be recognized

in such cases only when efforts are confirmed in the system and pushed for invoicing.

Till such time, the revenue cannot be recognized by the company.


18/19

18


Latest Balancesheet of Competition a comparison

One key input which we

all influence outside of

profitability in the balance

sheet is the Accounts

Receivables.

A quick snapshot of the

same clearly indicates our

unbilled at max. should be

in the range of 15 days

and at max DSO shouldbe below 80 days.


19/19

19


mahindrasatyam.com

Safe Harbor

This document contains forward-looking statements within the meaning of section 27A of Securities Act of 1933, as amended, and

section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are subject to

certain risks and uncertainties that could cause actual results to dif fer materially from those reflected in the forward-lookingstatements. We undertake no duty to update any forward-looking statements. For a discussion of the risks associated with our

business, please see the discussions under the heading Risk Factors in our report on Form 6-K concerning the quarter ended

September30, 2008, furnished to the Securities and Exchange Commission on 07 November, 2008, and the other reports filed with

the Securities and Exchange Commission from time to time. These filings are available at http://www.sec.gov

Thank you

Documents

How to Read a Financial Statement - An Overview