How to Do a Basic Financial Statement Analysis of an Indian Company

Step 1: Find the Company's Financial Statements

Before you can analyze anything, you need the documents. For any publicly listed company in India, finding financial statements is straightforward. These documents are public information.

Your first stop should be the company's own website. Look for a section called "Investor Relations," "Investors," or something similar. Companies usually post their annual reports, quarterly results, and investor presentations here. The annual report is the most detailed document you can find.

Another excellent source is the stock exchange websites. Both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) require companies to file their reports with them. You can search for the company on these sites and find all their corporate filings, including financial results.

You can view public company filings directly on the BSE India website under the Corporate Announcements section.

Step 2: Understand the Three Core Statements

Financial reports might seem complex, but they are built around three main statements. If you understand these three, you are halfway there.

The Balance Sheet: What a Company Owns and Owes

The Balance Sheet is a snapshot of a company's financial health at a single point in time. It follows a simple formula: Assets = Liabilities + Equity.

• Assets: These are the things the company owns that have value. This includes cash, buildings, machinery, and inventory (the products it has yet to sell).
• Liabilities: These are what the company owes to others. This includes loans from banks, money owed to suppliers, and other debts.
• Equity: This is the money that belongs to the company's owners (the shareholders). It's what would be left over if the company sold all its assets and paid off all its liabilities.

A healthy company typically has more assets than liabilities, resulting in positive shareholder equity.

The Profit & Loss (P&L) Statement: Is the Company Making Money?

The Profit & Loss (P&L) Statement, also called the Income Statement, shows how profitable a company was over a period, like a quarter or a year. Its basic formula is: Revenue - Expenses = Profit.

Here are the key terms to know:

1. Revenue (or Sales): The total amount of money the company earned from selling its products or services.
2. Cost of Goods Sold (COGS): The direct costs of making those products or services.
3. Gross Profit: Revenue minus COGS. It shows how efficiently the company produces its goods.
4. Operating Expenses: Costs not directly related to production, like salaries, marketing, and rent.
5. Net Profit: The final profit after all expenses, including taxes and interest on loans, have been paid. This is often called the "bottom line."

You want to see a company that consistently makes a net profit.

The Cash Flow Statement: Where is the Cash Going?

Profit is an accounting concept, but cash is king. A company needs real cash to pay bills and salaries. The Cash Flow Statement tracks the actual cash moving in and out of the company. It is broken into three parts:

• Cash from Operating Activities: Cash generated from the main business operations. A healthy company should have positive cash flow here.
• Cash from Investing Activities: Cash used to buy or sell long-term assets, like property or equipment.
• Cash from Financing Activities: Cash from activities like taking new loans, repaying old ones, or issuing shares.

A profitable company with negative operating cash flow is a major red flag. It might mean it's not collecting money from its customers efficiently.

Step 3: Analyse Key Financial Ratios

Numbers on their own don't tell the full story. Financial ratios help you compare a company's performance over time and against its competitors. Here are a few basic ratios to start with:

Step 4: Look for Trends Over Time

A single year's financial statement is just one data point. The real insights come from looking at trends over several years. Pull up the company's reports for the last three to five years and ask these questions:

• Is revenue consistently growing?
• Are profit margins increasing, decreasing, or stable?
• Is the company's debt level going up or down?
• Is the cash flow from operations strong and steady?

A company with steady growth in revenue and profits is much more attractive than one with unpredictable results.

Step 5: Read the Notes to Accounts

At the end of every financial report is a section called "Notes to Accounts." Many investors skip this, but it contains valuable information. The notes explain the accounting methods used by the company. They also disclose important details that don't fit into the main statements, like pending lawsuits, changes in accounting policies, or details about the company's debt.

Reading the notes can help you understand the quality of the company's earnings and uncover potential risks.

Common Mistakes to Avoid When Reading Financial Reports

As you get started, be mindful of these common pitfalls:

• Ignoring the Cash Flow Statement: Many people focus only on the P&L Statement. A company can show a profit but still go bankrupt if it doesn't manage its cash well.
• Forgetting About Debt: A company might look profitable, but high levels of debt can be very risky, especially if interest rates rise. Always check the Debt-to-Equity ratio.
• Comparing Apples to Oranges: You cannot compare the financials of a bank with a software company. Their business models are completely different. Only compare companies within the same industry.
• Skipping the Notes: The most important warnings are often buried in the notes. Taking 15 extra minutes to scan them can save you from a bad investment.

Learning how to read financial statements is a skill that builds with practice. Start with a company you know, follow these steps, and you will soon be able to assess the financial health of a business with confidence.