Dear Vivek,

Thnks a lot for a real warm up session!

Let me tell u that i bought 2 books on this subject and more or less have gone through it, i could not get such crystal clear summarised thought on gaining insight into managerial quality, the way u have explained.

Eagerly awaiting for more posts from u on the same subject. Not necessarily financials, but as explained in your post, the real stuff which enhnces our judgemental capacity.

Thnks, Basantji, for moving my post in the right thread.

Analysing Profit and Loss Accounts:

Income Statement as it is also called happens to be a the first thing to look at. Balance Sheet reveals the glory of the past, Profit and Loss reveals the immediately present. So, P/L accounts have an assuring effect and at times, they revela a turnaround happening place.

Before beginning, I will like to communicate the handicaps which IO face here. I have always hunted for asset backed stocks and hence I carry no expertise for service sector stocks like banking, Software etc. So, I will be glad if someone can help in that regard. Also, its extremely difficult to standardise everything, so what I will be indulging in is a genearl talk for level I before embarking on specifics.

Entities involved in profit and Loss Account:

1.Sales/Turnover
2.Excise Duty
3.Other Income
4.Raw Material Costs
5.Salaries wages.
6.Administrative costs and overheads
7.Depreciation
8.Other Expenditure
9.Interest.
10.Taxation and other Provisions.
11.Dividend.

Turnover: Turnover represents the source of revenue. It shows the income a company makes by selling its products.So, a company always try to expand its turnover so that it can generate more and more profits. So long as marginal revenue exceeds marginal costs, the firm will try to expand its sales, subject to the limiting factors. Analysts try to look at various component of costs as a percentage to turnover to determine how much is the firm extracting from its revenues. In ratio analysis, turnover is the most commonly used component.

2.Excise Duty: Its an indirect tax paid by companies on the profuction they do. So, it has a more or less a perfect correlation to the Sales.

3.Other Income: Perhaps the most important thing we must pay attention to. They can be segregated in 2 parts:A. recurring and B. Non-recurring. Recurring Other Income is like Dividend received on Investments, Commision on service provided, Interest on loans and Advances.Such income is a regular feature and hence can be safely construed as a part of total Income. However, with Non-recurring Income, we should always examine in graeter details. Entities like profit on disposal of undertaking, tax provision write backs, Interest waivers etc. are very distorting entities. We should remove the sum of such figures from total income(turnover+Other income) to arrive at, what I call Regular Income.

4.Raw Material Costs: The Raw materials represent the material used in the manufacturing of a product. The material passes through various stages of an operating cycle. Raw materials and work-in-progress are shown as how much are they consumed, i.e. they are shown as Opening Stock+Purchases-Sold. Cost of Goods Sold perhaps reflect the most important feature of a business, the margin. Increasing turnover with increasing margin are the businesses which one must get into. However, one must observe the skope of the margin picture. The slope must be upward sloping, i.e the margins should be increasing consistently. In many businesses which are heavy dependent upon volatile commodities, the margins will keep on varying. For instance, those which depend a lot on crude, are not likely to have a consistent pattern. Also, many companies do a lot of trading activity. In such case also, margins get artificially supressed or exploded, when compared quarter or quarter.