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MENTORSHIP - Fundamental Analysis - Company Analysis - P&L Analysis -…
MENTORSHIP - Fundamental Analysis - Company Analysis - P&L Analysis
How do we understand P&L risk?
A P&L statement is a quarterly report card of a company. I tell how a company's management has performed.
What is always is visible is a company. BUT what is always NOT visible is a management of that company.
That is the reason why we analyse a management in terms of qualitative and quantitative analysis.
A company is visible as buildings, brand and in terms of many other aspects. That is part of fundamental analysis but is not really crucial. What is most important is the management behind a compnay.
A qualitative analysis about a management comes from reading about the company and management in news or magazines and also reading the annual report.
ASSIGNMENT: Read 2-3 annual reports of good companies in Nifty 50. Take the ones that have the highest ROCE. For ROCE, go to screener.com. For annual reports go to company websites or BSE website.
The quantitative aspect of trading comes from analysis of P&L.
For investing, you should do a deep dive analysis of results but for trading you should do a quick look analysis of results.
A P&L shows what is bringing money into the company and what is taking the money out of the company.
Money coming into the company is positive risk (good) and money going out of the company is a negative risk (bad).
Revenue brings money into the company and expenses take money out of the company. Whatever remains is a profit.
The expenses a company is incurring should be allocated well to the revenue. That means what are the direct expenses and what are the indirect expenses that are responsible for bringing in the revenue.
If a company cannot allocate expenses better, it will ruin itself in the long term.
A good company is separated from a bad company in expense management not just in revenue generation.
A good company should be a good revenue generator and an even better expense manager.
If a company struggles in terms of revenue generation, expense management will always save the day for them!
A revenue when allocated to direct and indirect costs, and then to total costs, will lead to different kinds of profits.
When direct and fixed costs are removed, gross profit comes into picture. And a good gross margin is what a company eyes on its products.
If a company gives up numbers about gross profit and its components, it will be giving up its operating model to competitors. Hence, companies are allowed to report only the operating profit, which is a result of revenue - total expenses.
Revenue - costs = Operating profit. Costs here are related to the operations of the company directly and indirectly from inside the company.
After operating profit, there are some external costs because a company is in a society or ecosystem. To important costs are finance charges (on loans taken from banks) and taxes (for living in the country's land). These two come out of the operating profit. Some good companies put finance charges within operating profit. So you analyse accordingly.
A company that is good on expense management is said to have a great OPERATING LEVERAGE.
A company with good operating leverage is always bought by big boys, while a company with bad operating leverage is always ignored by them.