Now let’s see the important factors in Income sheet or Profit and
Loss SheetàThis shows the information about
company’s income, sales, net profit/loss on quarterly and yearly basis.
The income sheet shows the current
uptrend or downslide in a company compared to last quarter/ year.
There are certain terms in the
income sheet which are self-explanatory, e.g
·
Net Sales,
·
other income,
·
Capital Expenditure
·
Operating Profit
·
PBDIT ( Profit before deducting income tax),
·
Earnings Per Share,
·
Book Value,
·
P/E ratio,
·
Depreciation.
I will explain some of them, which
may not be clear to beginners, but has immense value
à Earnings per share: it is also termed as EPS. You should see from
Quarterly Result if the EPS is steadily increasing or stable or decreasing. An
gradual increasing EPS is healthy sign and such shares are for MT or LT
investment. One thing you may note, that a company is doing very good but in a
certain quarter the EPS is decreased. In
that case check if the company has issued bonus share (you can check if the
number of shares is increased
). Naturally the EPS [= Total Earning/ Number of
share ] has gone down. So total earning is a more clear indicator than EPS.
Depreciation: As an industry works, with time its machinery ,
equipment becomes older or obsolete, which needs replacement and incur costs.
This is known as Depreciation. This is the amount which is deducted from total
profit before depreciation before taxation.
Some time companies show greater
profit by showing less depreciation in income sheet. You can add the two
factors ‘
Profit before depreciation’ and ‘
Depreciation’ to get the
total
Cash flow which is a much better indicator.
P/E Ratio: Never forget to
check this parameter before investing in a share. It is known as
Price to Earnings Ratio. You get a P/E
of a company by dividing Market Value of a share by Earning per share.
Say for a company be EPS is 5 and
Market value of the scrip is 70.
So P/E is 70/5 = 14
Share with very slow PE < 5 tends
to indicate very less interest of buyers. Share with PE >20 is something
always in demand.
Share with PE 11 to 15 are
considered as Good Buy. Exception
exists although.
Share with very High PE say 40 to 130 are very unstable, may crash
heavily when market crash. But this is not a rule of thumb; there are various
other factors to be checked before deciding only on PE. At times you may see
Analyst are Suggesting you to enter a stock even if the PE is very high, cause
they feel, the share may reach further highs. Book
Value: The book value is the net
worth of the company’s
Equity Share Capital + Reserves divided by
Number of share outstanding. If you
further divide
Market Price by Book
Value and see if the ratio is greater than 1. If yes then you must note
that investor s are valuing the company in a higher price, then what the
company itself feels what it will earn if it go for liquidation and forced to
sell all its assets and pay off the lenders.
Capital Expenditure: It includes the costs for new acquisition,
expansion plan and also the depreciation cost.
Generally you will find that
Capital Expenditure exceeds the depreciation cost, capital expenditure includes
various other expenses. But at certain consecutive quarter if you see that
Capital Exp is matching the depreciation cost then you must ask these question
to yourself
à Has the company stopped expansion
plan?
Is the market is losing faith in
its product, hence no new investment?
If it happens for 4-6 consecutive
quarters, then it may be time to quit the share. Of course you can not expect a
company always to expand.
PBDIT and Net Profit: If you deduct Net profit from PBDIT (
Profit before deducting tax) you will
find the tax paid. If net sales is more less stable and tax paid is decreasing,
that’s good sign, as a better tax planning by a company is always good for its
investor.
To be Continued....