Profit and Loss Statement How to understand Revenue Figures and Other Key Metrics for smart Investment Decisions

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Marketopedia / Fundamental Analysis / Profit and Loss Statement How to understand Revenue Figures and Other Key Metrics for smart Investment Decisions

The Profit and Loss statement

The Profit and Loss statement is commonly known as the P&L Statement, Income Statement, Statement of Operations, or Statement of Earnings. It reveals what has occurred over an interval and gives data on revenue, expenses, and net income.  The P&L statement reports information on:

  1. The yearly or quarterly revenue of the company 
  2. The expenses incurred to generate the revenues
  3. Tax and depreciation
  4. The earnings per share number

By referencing the P&L statement of Amara Raja Batteries Limited (ARBL), I can demonstrate how to interpret the financial statements. Examining each line item closely should help to get an in-depth understanding.

– – The Top Line of the company (Revenue)

Analysts often mention the top line when discussing a company – they are referring to its revenue figure listed on its P&L statement. This is the first entry displayed in the Profit and Loss report.

Before we begin analysing the income portion, let us pay attention to several points mentioned in the title of the P&L report:

The header clearly states:

  1. The statement of P&L for the year ending March 31, 2014 is an annual statement — not a quarterly one. This statement reflects FY13-14 numbers.
  2. All amounts are calculated in Rupee Million. To give you a context, 1 million rupees is Rs. 10 lakhs. The company can choose between this and Ten Lakhs, whichever they deem most suitable.
  3. The details display the primary topics of the statement. In the schedule (also known as the note section), any related notes to them can be found. Additionally, a corresponding number is given to each note (i.e. Note Number).
  4. When companies report their financial statements, the current year’s figures typically appear in the leftmost column, with last year’s results on the right. In this instance, those columns are for FY14 (the most recent) and FY13 (prior).

Sales of Products are basically the first line item on the revenue side. 

We are dealing with a batteries producer, and their sales for FY14 are estimated at Rs.38,041,270,000/- or around Rs.3,804 Crore. This is a significant jump from FY13’s Rs.3,294 Cr in battery sales.

I would like to point out that all the figures will be expressed in Rupee Crore for ease of understanding.

The following line item is the excise duty, a payment of Rs.400 Crs made to the government, which will be deducted from the company’s income.

After considering the excise duty, ARBL’s revenue for FY14 was Rs.3403 Crs, up from FY13’s Rs.2943 Crs.

Apart from product sales, the business additionally obtained revenue from services. This may have been through annual battery maintenance, which earned Rs.30.9Crs in FY14.

The company also reports “other operating revenues” at Rs.2.1crs which may be from the sale of products or services incidental to its primary operations.

Finally, the revenue from the Sale of products + Sale of services + Other operating revenues sums up to give the company’s total operating revenue

In total, the company’s operating revenue for FY14 is Rs.3436 Crs, and FY13 is Rs.2959 Crs. Note 17, associated with ” Net Revenue from Operations” will give further insight into this matter.

We discussed notes and schedules of the financial statement in the previous chapter, so let’s recall that.

This note contains information about 17. The following illustration provides the details.

The notes provide a thorough analysis of the breakdown of revenues from operations, excluding other income information. Section ‘a’ of the particulars discusses sales of products specifically.

  1. The sales of finished storage batteries in FY14 totalled Rs.3523 Crs, a substantial increase from the Rs.3036 Crs recorded in FY13.
  2. In FY14, the sale of storage batteries amounted to Rs.208 Crs, a substantial increase from the Rs.149 Crs of the previous fiscal year. This stock in trade includes finished goods from the prior fiscal year that have been sold during this one.
  3. In FY14, sales of home UPS were marked at Rs.71 Crs compared to Rs.109 Crs the year before.
  4. Net sales from products, taking excise duty into account, total Rs.3403 Crs, as reported in the P&L statement.
  5. One can observe the division of revenue from service; the figure of Rs.30.9 corresponds to the amount declared in the profit and loss statement.
  6. The company’s note stated that the sale of process scrap had brought in Rs. 2.1 Cr of revenue. This was due to its incidental nature and accounted for under ‘Other operating revenue’.
  7. The total amount of the company’s revenue streams amount to Rs.3436 Crs., which is the net revenue from operations. This figure is derived from the Rs.3403 Crs, Rs.30.9 Crs and Rs.2.1 Crs income sources.
  8. You can also find similar split up for FY13

When you look at the P&L, apart from operating revenue, ARBL also reports ‘Other Income’ of Rs.45.5 Crs. Note 18 outlines the details of this income source.

We can observe that the other income incorporates money which is not related to the primary operations of the company. Interest on bank deposits, dividends, insurance claims, and royalty income all make up this portion of the money. One should expect it to constitute merely a minor amount of the overall income. A sizeable ‘other income’ will likely raise suspicions, thus prompting further examination.

The total revenue for FY14 amounts to Rs.3482Crs, which has been obtained by summing up the income generated from operations (Rs.3436 Crs) and other sources (Rs.45 Crs).