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Fundamental-analysis

The income statement: the place where profit livesToday we are going to look at the second of the three main reports that a company publishes during the earnings season, the income statement. Just like the balance sheet, it is published every quarter and year. This is how we can find out how much a company earns and how much it spends. The difference between revenues and expenses is called profit . I would like to highlight this term "profit" again, because there is a very strong correlation between the dynamics of the stock price and the profitability of the company. Let's take a look at the stock price charts of companies that are profitable and those that are unprofitable. 3 charts of unprofitable : 3 charts of profitable : As we can see, stocks of unprofitable companies have a hard enough time growing, while profitable companies, on the contrary, are getting fundamental support to grow their stocks. We know from the previous post that a company's Equity grows due to Retained Earnings. And if Equity grows, so do Assets. Recall: Assets are equal to the sum of a company's Equity and Liabilities. Thus, growing Assets, like a winch attached to a strong tree, pull our machine (= stock price) higher and higher. This is, of course, a simplified example, but it still helps to realize that a company's financial performance directly affects its value. Now let's look at how earnings are calculated in the income statement. The general principle is this: if we subtract all expenses from revenue, we get profit . Revenue is calculated quite simply - it is the sum of all goods and services sold over a period (a quarter or a year). But expenses are different, so in the income statement we will see one item called "Total revenue" and many items of expenses. These expenses are deducted from revenue gradually (top-down). That is, we don't add up all the expenses and then subtract the total expenses from the revenue - no. We deduct each expense item individually. So at each step of this subtraction, we get different kinds of profit : gross profit, operating income, pretax income, net income. So let's look at the report itself. - Total revenue This is, as we've already determined, the sum of all goods and services sold for the period. Or you could put it another way: this is all the money the company received from sales over a period of time. Let me say right off the bat that all of the numbers in this report are counted for a specific period. In the quarterly report, the period, respectively, is 1 quarter, and in the annual report, it is 1 year. Remember my comparison of the balance sheet with the photo ? When we analyze the balance sheet, we see a photo (data snapshot) on the last day of the reporting period, but not so in the income statement. There we see the accumulated amounts for a specific period (i.e. from the beginning of the reporting quarter to the end of that quarter or from the beginning of the reporting year to the end of that year). - Cost of goods sold Since materials and other components are used to make products, accountants calculate the amount of costs directly related to the production of products and place them in this item. For example, the cost of raw materials for making shoes would fall into this item, but the cost of salaries for the accountant who works for that company would not. You could say that these costs are costs that are directly related to the quantity of goods produced. - Gross profit (Gross profit = Total revenue - Cost of goods sold) If we subtract the cost of goods sold from the total revenue, we get gross profit. - Operating expenses (Operating expenses are costs that are not part of the cost of production) Operating expenses include fixed costs that have little or no relation to the amount of output. These may include rental payments, staff salaries, office support costs, advertising costs, and so on. - Operating income (Operating income = Gross profit - Operating expenses) If we subtract operating expenses from gross profit, we get operating income. Or you can calculate it this way: Operating income = Total revenue - Cost of goods sold - Operating expenses. - Non-operating income (this item includes all income and expenses that are not related to regular business operations) It is interesting, that despite its name, non-operating income and operating income can have negative values. For this to happen, it is sufficient that the corresponding expenses exceed the income. This is a clear demonstration of how businessmen revere profit and income, but avoid the word "loss" in every possible way. Apparently, a negative operating income sounds better. Below is a look at two popular components of non-operating income. - Interest expense This is the interest the company pays on loans. - Unusual income/expense This item includes unusual income minus unusual expenses. "Unusual" means not repeated in the course of regular activities. Let's say you put up a statue of the company's founder - that's an unusual expense. And if it was already there, and it was sold, that's unusual income. - Pretax income (Pretax income = Operating income + Non-operating income) If we add or subtract (depending on whether it is negative or positive) non-operating income to operating income, we get pretax income. - Income tax Income tax reduces our profit by the tax rate. - Net income (Net income = Pretax income - Income tax) Here we get to the income from which expenses are no longer deducted. That is why it is called "net". It is the bottom line of any company's performance over a period. Net income can be positive or negative. If it's positive, it's good news for investors, because it can go either to pay dividends or to further develop the company and increase profits. This concludes part one of my series of posts on the Income statement. In the next parts, we'll break down how net income is distributed to holders of different types of stock: preferred and common. See you soon!
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NSE:BANKNIFTYEducation
by Be_Capy
2
At the beginning was the EquityWith this post, I am concluding the analysis of the company's balance sheet. You can read the previous parts here: Part 1 - Balance sheet: taking the first steps Part 2 - Assets I prioritize Part 3 - A sense of debt Now we know that every company has assets on one side of the balance sheet and liabilities and equity on the other side. If you add liabilities and equity together you get the sum of assets. And vice versa, if you subtract all of the company's liabilities from the assets, you get what? That's right, you get Equity . Let's discuss this important component of the balance sheet. When a company is first established, it must have initial equity. This is the money with which any business starts. It is used for the first expenses of the new company. In the case of our workshop , the equity was the master's savings, with which he bought the garage, equipment, raw materials and other assets to start his business. As sales progressed, the workshop received the revenue and reimbursed expenses. Whatever was left over was used to boost the company's profit. So, our master invested his capital in the business to increase it through profits. Making a profit is the main purpose for which the company's assets work, loans are raised, and equity is invested. Let's see which balance sheet items are in the Equity group: - Common stock (The sum of nominal values of common stock issued). Remember, when our master decided to turn his company into a stock company , he issued 1 million shares at a price of $1,000 per share. So $1,000 per share is the par value of the stock. And the sum of the nominal values of the stocks issued would be $1 billion. - Retained earnings . It is clear from the name of this item that it contains profits that have not been distributed. We will find out where it can be allocated in the next post, when we start analyzing the income statement. - Accumulated other comprehensive income (Profit or loss on open investments). The profit or loss of a company can be not only from its core business, but also, for example, from the rise or fall in the value of other companies' shares that it bought. In our example, the workshop has oil company shares. The financial result from the revaluation of these shares is recorded in this item. So, the equity is necessary for the company to invest it in the business and make a profit. Then the retained earnings themselves become equity, which is reinvested to make even more profits. It's a continuous cycle of the company's life that bets on equity growth. Which balance sheet items are of interest to me in the Equity group? Of course, I am interested in the profit-related items: retained earnings and profit or loss on open investments. The sum of nominal share values is a static indicator, so it can hardly tell us anything. However, it is better to use information from the income statement rather than the balance sheet to analyze earnings, because only this report allows us to see the entire structure of a company's income and expenses. So we conclude the general analysis of a company's balance sheet. To fully understand why it is needed, let's engage our imagination once again. Do you remember the example with the hotel ? We imagined that a joint stock company is a hotel with identical rooms, where you, as an investor, can buy a certain number of rooms (one room = one share). Think about what you would want to look at first before buying? Personally, I'd rather see photos of the rooms. So, the balance sheet can be compared to such photos that we get from the hotel at quarterly and annual intervals. Of course, in such a case, the hotel will try to use special effects as much as possible in order to improve investors' impression of the photos released. However, if we track and compare photos over multiple periods, we can still understand: is our hotel evolving, or have we been watching the same couch in a standard room for 10 years in a row. We can say that the balance sheet is a "photo" of the company's assets, debts and equity at the balance sheet date. And the balance sheet items I've chosen are what I look at first in this photo. In the next series of posts, we will break down an equally important report, the income statement, and explore the essence of earnings. See you soon!
NSE:TATAMOTORSEducation
by Be_Capy
Chamanlal Setia Exports Ltd (CLSEL)Chamanlal Setia Exports Ltd (CLSEL) Bullish on this stock. Even with so much of panic selling in the overall market Volume on the bearish candles are not so great. Stock is in the uptrend. Forming Hammer candle near 55 SMA level which is also 0.382% level of Fibonacci retracement which might be a sign of bounce back. Target 1: 135 Target 2: 140 SL for a low-risk trader:- Just below the hammer candle i.e 124 SL for a risky trader:- Below the trend line i.e near 119 Disclaimer:- This is not any buy or sell recommendation, it is just for educational purpose. Take any call for buy or sell call only after consulting with your financial expert. Let's learn together and keep growing.
NSE:CLSELLong
by TradingWithVerma
5
Contra Bet on ITC. Will it work?NSE:ITC I have a detailed analysis on this stock and also know that many investors are frustrated holding this script. It is also clear that demerger is not happening anytime soon so we do not have a comfort for value unlocking from this parameter. But in a contra bet, script has a strong Fundamentals. According to the chart patterns, stock is trading at the lower range of bollinger band. This provides an opportunity to Buy at lower edge (Not trying to fish the bottom). Medium term trend suggests a direct hit of Rs.275 in 3 months. Fundamentals suggest risk reward ratios are favourable at current levels. The idea shared is only for educational purpose.
NSE:ITCLong
by jay-chopra
3
A sense of debtIn the previous two posts, we explored how assets are grouped in a company's balance sheet. Part 1: Balance sheet: taking the first steps Part 2: Assets I prioritize Now let's deal with Liabilities and Stockholders' equity. Let me remind you that these are the sources of funds that give a company assets. And indeed, with what funds can a company have assets? Either with its own funds (stockholders' equity), or with funds borrowed (liabilities). For simplicity, we will call them Debts and Equity. Debts can vary in maturity, so we've divided them into two categories in the balance sheet: Current liabilities and Non-current liabilities . Current liabilities include: - Current debts are debts that need to be paid back within a year after they are incurred. Do you remember our master took a loan from the bank to make a large batch of boots? That loan will be recorded in this item (assuming the loan is up to one year in repayment). - Accounts payable (debts to suppliers of goods and services). You can borrow money not only from the bank, but also from your suppliers, for example. In other words he is giving you raw materials now, but is ready to accept payment later. Such debts are reflected in this item. - Accrued liabilities (Provisions for future expenses on unpaid bills in the form of wages, rent, taxes). The word "debt" is in many ways synonymous with the word "liability." A company may have many such liabilities: payment of wages, rent and taxes. In essence, these are also debts to be paid during the year. For convenience, cash reserves are set aside for them. They are spent at the moment when the payment is due. Such reserves are recorded in this item. - Other current liabilities . Debts or liabilities with a maturity of up to one year that are not included in the categories above are shown here. Non-current liabilities include: - Long term debt - these are debts that need to be paid back more than one year after they are incurred. If our master had borrowed from the bank for two years, such a loan would fall into this category. - Deferred taxes liabilities (Provision for taxes to be paid in a future period). Tax rates are subject to change, and new taxes may come into effect in a year or more. But even now, the company can set aside money for future taxes. - Other long term liabilities . Here are debts or liabilities with a maturity of more than one year that are not included in the categories above. In short, debts are loans taken by the company, provisions for tax liabilities, and debts to suppliers. The amount of debt is a very important indicator in the fundamental analysis of a company. On the one hand, the mere presence of debt is not scary, because it demonstrates that banks trust the company and give it loans for development. On the other hand, a substantial amount of debt can cause serious problems and losses in the period of weak sales of goods or services. Banks are unlikely to suspend interest charges on loans if a company is doing poorly. This means the company will incur expenses in the form of interest on loans that are not offset by revenue. Also a reminder that if a company goes bankrupt, the owners of the stock get the assets of that company only after all debts have been settled . If the debts are so large that they exceed the value of all the property, the shareholders get nothing. For these reasons, I select companies with small debt loads. What liabilities do I focus on? - Current debt; - Accounts payable; - Long term debt. For me, these are the items that most clearly reflect the company's debt situation. In the next post, we will conclude our study of the balance sheet and look at the basic source of assets, which is Equity. See you soon!
NSE:HDFCBANKEducation
by Be_Capy
Assets I prioritizeIn the previous post Balance sheet: taking the first steps , we began parsing the balance sheet of the imaginary workshop and focused on assets. Today, I suggest looking at what types of tangible and intangible property are classified as current assets and what types are classified as non-current assets. Current assets contain the following items: - Cash and cash equivalents - in our case we can include a safe with money, which, in general, corresponds to the company's cash in its current bank accounts. - Net receivables - here we would include the IOU from a friend. That is everything that clients owe the company for goods or services. - Inventory - this includes a bag with leather, rubber and thread. That is all raw materials, from which goods are made, as well as stocks of finished goods in warehouses. - Other current assets - this can include other current assets that do not belong to the previous items. Non-current assets include the following items: - Net property, plant and equipment - we include a garage, table, chair, sewing machine and tools. Depreciation is deducted from the original cost of the property when reporting it. Depreciation is the cost to repair and renew the property. - Equity and other investments - in our example, this would include oil company stocks (and in general, any company investment in stocks or bonds of other companies). - Goodwill - let's say our company wants to buy another company and is willing to pay $11 million for it. The assets of the other company are $10 million, and the debts that our company will have to pay for the other company are $2 million. So the assets net of debt are $8 million. After the purchase, the assets and debts of that company will become the assets and debts of our company. So, the difference between the purchase amount of $11 million and the net assets of $8 million is a goodwill equal to $3 million. For our workshop, this item is not relevant, as it didn't buy any company. Nevertheless, remember that goodwill is the difference between the purchase price of another company and its net assets. - Intangible assets - this can include the value of the customer base in the master's phone book, as well as any other assets that have no tangible basis (such as purchased trademarks). - Other long term assets - this item includes other non-current assets that don't belong to the previous items. Once we understand which asset belongs to which item, its value (or rather, the sum of the values of all assets belonging to this item) is written in the balance sheet. For example, let's say we've determined that the Inventory item includes leather, rubber, and thread. The accountant adds up the value of the leather, rubber, and thread and writes the total amount in monetary terms against the Inventory item. This is how the numbers appear in the balance sheet. Now let's discuss which balance sheet items we should pay attention to during the fundamental analysis of assets. I have formulated the following rule for myself: pay attention to the assets that are directly related to the sale of the company's goods or services . If a company does not sell its goods or services well, its bank account balance will shrink, huge inventories of unsold goods and raw materials will accumulate in its warehouses, and accounts receivable (customers debt) will grow. The fact is that when sales are bad, the company is ready to lend out goods as debt. If sales are going well, then, on the contrary, the money in the account will grow, and accounts receivable and inventory will start to shrink. All other assets can influence sales only indirectly, so I don't consider them. Thus, I have identified my priority assets : - Cash and cash equivalents; - Net receivables; - Inventory. As you can see, they are all quick current assets. Non-current assets only indirectly affect sales, so they are not a priority benchmark for me. In the next post, we'll start looking at the right side of our disclosed book, called the Balance sheet. That's where the company's liabilities and equity belong. See you next time!
NSE:NIFTYEducation
by Be_Capy
Two Fundamentals Ideas: EIL and IGL EIL : Engineers India Ltd (# NSE:ENGINERSIN ): CMP: 83.25 DVM (Durability - Valuation - Momentum) score: 60-43-68. Consensus Price target for 1 year: 100 (19% upside). Reasons: 1. Engineers India Ltd.'s Revenue was higher than average estimate 2 times in past 3 years 2. EPS is expected to grow by 4.2% in FY23 3. The consensus recommendation from 5 analysts for Engineers India Ltd. is STRONG BUY IGL : Indraprasthe Gas ( NSE:IGL ): CMP: 416 DVM (Durability - Valuation - Momentum) score: 60-40-57. Consensus Price target for 1 year: 500 (20% upside). Reasons: 1. EPS is expected to grow by 12.2% in FY23 2. The consensus recommendation from 30 analysts for Indraprastha Gas Ltd. is BUY 3. Only concern: Indraprastha Gas Ltd.'s Revenue was lower than average estimate 2 times in past 3 years
NSE:IGLLong
by pradipandsuvra
Balance sheet: taking the first stepsToday we are going to start learning about fundamental analysis of companies. In my opinion, this is the basic skill you should have when picking stocks to invest in. Once again, the main principle of the strategy I follow is to pick outstanding companies and buy their stocks at a discounted price. You may have noticed that first-class products are occasionally discounted in stores, but not for long, because such products are quickly swept off the shelves, and almost the next day the price is again without a discount. Exactly the same strategy is applicable to the stock market. Now, fundamental analysis is a method for picking outstanding companies (that is, companies with strong fundamentals). How can we tell if a company has a strong foundation or not? There is only one way - by analyzing its financial statements. Every listed company has to disclose this information publicly on its website. In other words, we don't have to extract that information - it is publicly available. You can also find it on TradingView and see the data in dynamics. What is the content of this information? The company publishes three reports : balance sheet, income statement and cash flow statement. The balance sheet, like the order book , can be presented as an open book. The left side of the book lists the company's assets and their valuation in monetary terms, and the right side lists the company's liabilities and equity , and their valuation in monetary terms. What are company assets? These are everything that belongs to the company: buildings, equipment, trademark, shares of other companies, cash in the cash register. In general, all tangible and intangible property of a company are assets. What are liabilities and equity of a company? These are the sources of funds that gave rise to the assets. For example, if you bought a computer for $1000 with your savings, then the computer is an asset, and your own savings are equity. If a friend lent you $100, and you put the money in your pocket, the money in your pocket is an asset, and the debt to your friend is a liability. Based on these examples, you can make an imaginary balance sheet: As you can see, the entry in the balance sheet is the name of the asset, liability or equity and their monetary value. Assets, liabilities and equity are inextricably linked, so the sum of assets is always equal to the sum of liabilities and equity . If we were to write every asset in this way on the balance sheet of a large company, it would turn into an endless book of hundreds of pages. However, if we look at the balance sheets of huge corporations, they can fit on a single sheet of paper. This is due to the fact that over time invented to group the same type of balance sheet items. Let's look at how the company's balance sheet items are grouped: Don't be frightened. Now we will try to digest this table with the help of an example we are already familiar with. Let's think back to our master cobbler , specifically to the period when he was just starting out. Let's assume what exactly he had at that time: a garage, a table, a chair, a sewing machine, tools, a bag with leather and rubber, thread, a safe with money, a phone book with clients' contact information, a IOU from his friend, and oil company stocks. I have now listed the assets of our master, or should I say, of his workshop. I should note that what is listed here is exactly what is directly related to his business. Even the money in the safe, the debt from his friend, and the oil company shares came about because of the existence of the business. Let's say the master's apartment or the bicycle he rides in the park are not assets, because they don't belong to the workshop. They belong to the master, but not to his business. Let's categorize the workshop's assets into groups. There are two big groups: Current assets and Non-current assets . How should you distinguish them? The general rule is this: Current assets are what a company's product is made of, and what can turn into money in the near future, so they can be called quick assets . Non-current assets are where and with what we create the product, and what can turn into money not so soon (so they can be called long-term assets ). So, here we go: - A garage, a table, a chair are where we create a product, so a long-term (non-current) asset. - A sewing machine, tools - this is what we use to create a product - a long-term (non-current) asset. - A bag with leather and rubber and thread is what a product is made from - a quick (current) asset. - A safe with money is already real money - a quick (current) asset. - A phone book with customer numbers - it's hard to sell it to someone quickly, such assets are also called intangible assets and are placed in long-term (non-current) assets. - IOU from a friend, i.e. a friend bought boots from a master, but can pay only after receiving his salary - a quick (current) asset. - Shares of an oil company - let's assume that a customer once paid for the boots with them - a long-term (non-current) asset. So, we've just categorized the master's assets into two groups: current assets (quick assets) and non-current assets (long-term assets). In the next post, we'll break down the components of these two large groups. See you then!
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NSE:RELIANCEEducation
by Be_Capy
6