Tuesday, January 2, 2018

Problem Called 'Life'

Wishing my blog visitor a very happy and prosperous new year. Hoping you identify and achieve whatever has been troubling you and succeed in life.

I started reading again (or at least trying to read something) and questions started popping in mind. What completes us? What do we actually want in life? Why their is a gap between perceived and actual reality? and last but not the least - why a constant thought keep us bothering about what we have achieved is not enough? And this land us to most important problem which all want to solve and that's called 'Life'.

There is no answer or quick solution to all these questions if you were expecting something here. Probably, reading between the lines in Gandhi's Talisman will help. It is sadistic approach if you think deeper, but that's what we as a human have turned into. And you will realize, while this is not a best thing to do all the time but you will find changing your frame of reference slightly, may lift your spirit a bit on which you can build further. 

Most importantly - stop treating it like a problem and leave it to go on it's own. Just think - "Given all this, what you want to do about it". It will help. Cheers to Life!

P.S. - I should have used 'I' instead of 'We' but my experience with other's with similar background who were open to share experience in environment administered by a college professor - all think alike. And problem is at all level - be it someone who seem to have achieved everything and someone who haven't achieved anything at all.

Tuesday, October 3, 2017

Financial Accounting

Disclaimer - I am writing this for my reference and this may or may not make any sense to you. Read further on your own risk.

I was thinking since quite some time to write a note on learning from classes and after a prolonged gap putting few of the key concepts. Here it goes -

While most of us have come across terminologies like Balance Sheet, P&L (Income) statement and Cash flow statement but we are unaware of the underlying concept.

Balance sheet can be defined as balancing what we own and what we owe. In accounting terminology, this can be written as
Asset = Liabilities + Share Holder Equity
Expanded version > 
Fixed Asset + Investments + Current Asset - Current Liability = Secured Loan + Unsecured Loan + Deferred Tax + Shareholders' Equity

P&L statement is just a readable version of the information hidden in BS and summarize the organization operations for specific period.

Considering there are opportunities to fudge the data and represent in favorable light there was a need of another report which entails the cash status for a company. That’s where cash flow statement comes into picture. This is difficult to fudge as it accounts only cash in-out (revenue/expenses) details and can provide overview of cash position of company.

While these were key principle associated with financial accounting, to learn about financial well-being of company one need to do financial analysis. Common size analysis, trend analysis and DuPont analysis offers great tool to analyze companies overall health of company in simplistic ways.

Return on Equity (ROE) = Profit/Equity 
                                        = Return on Sales (ROS) * Asset Turnover (ATO) * Equity Multiplier (EM or Financial Leverage) 
                                        =  Profit/Sales * Sales/Asset * Asset/Equity 
                                        = (Profit/EarningBeforeTax * EBT/EarningBeforeInterest&Tax * EBIT/Sales) * Sales/Asset * Asset/Equity

Where Profit refers to ProfitAfterTax(PAT)

Above statement can also be written in not so layman terminology as

ROE = (Tax Burden * Investment Burden * EBIT%) * Asset Turnover * Equity Multiplier

Management team typically looks at EBIT% and ATO. Remaining are Financial, Treasury and Tax team handles.

Detailed chart for covering each area of dupont analysis can be understood from the chart below –

In most of the cases it can be assumed that higher is better except when it comes to Current Asset TO and Inventory TO which should be evaluated in inverse thereby making them lower the better. On similar line Collection period should be lower the better.

Profit Margin refers to operating efficiency and can be elaborated/improved through cost ratio’s as shown in chart.

Asset turn over ratio simply means asset use efficiency which means generating more revenue for each added asset.

Ratio analysis YOE or with peer provide a level ground to analyze a company. This analysis holds good for most of the industry accept banking industries.

Common Size analysis also offers a good tool to analyze companies at basic level whereby BS, P&L and CF data are converted into percentage format and sub-component broken down as % of top component.

In trend analysis a base year is identified and then growth is calculated for each and every component in terms of base year.

Common size and Trend analysis are very basic methods and typically detailed analysis using DuPont should be performed. Comparison should be restricted within the industry as for each industry ratio and baselines will be different.

Last but not the least - how these can be used? Do the analysis of the company which are publicly listed and if there are any stock which are beaten by the market but strong on fundamentals there you have got your pick of the portfolio.

P.S. - While writing these I was thinking that I am diluting the branding of the blog page. But then at the same time I thought probably my old blog page viewers are long gone because of my post frequency. So better to put something and move-on rather then making this page dead.