MENTORING - Fundamentals - Company fundamentals - P&L risk - Coggle…
MENTORING - Fundamentals - Company fundamentals - P&L risk
We can analyse management qualitatively and quantitatively.
How can we assess a company or its management quantitatively.
To assess quantitatively, we need numbers from the company. What numbers does a company generate?
A company, as part of its business, always takes a decisions on a daily basis. These decisions are always impacting the flow of money into and out of the company.
This is the kind of data that a company generates on a daily basis.
Within these data, there are two types of data. (a) data that the company uses only internally, as it is of strategic importance to the company; (b) data that the company gives to the outside world for the world to know about it.
The first set of data is called management accounting. While the second set of data is called fundamental accounting or financial accounts.
Financial accounts are what a government or a regulator or an investor or the media can use. Even if a court wants a data on a company, it can get only the financial accounts.
But the real gold is always in the management accounting part.
Since every decision has a monetary impact, the company has to account for (note down) the numbers related to each decision. In doing so, it gets some data that it uses internally - and that is very powerful.
However, we are going to make an effort to slightly get a hint of what a company's management accounting data says - by using the financial accounts.
Why do we need this data? It helps in understanding how efficiently a company is using the resources to generate profit for the future.
We are going to observe two important aspects about the quantitative of a company: (a) how well the company is performing; (b) how strong the company is internally.
To assess a company's financial performance, the company gives two types of data under financial accounts: (a) a Profit and Loss (P&L) account; (b) a Balance Sheet (BS) account.
As discussed earlier, all decisions taken by a company entail a monetary impact. These are recorded in some books of accounts and are given various names.
All the financial accounting data goes into various individual accounts. These accounts are classifed into flow accounts and stock accounts. Flow accounts are summed up and listed under P&L, while stock accounts are listed under BS.
A flow account is measured over a period of time, while a stock account is measured at a point in time.
The company gives the fundamental accounts to the public in two parts: (a) a P&L, which is given every quarter; (b) a BS, given every six months.
Our effort is to understand how well the management is running the company every quarter. However, we also should know how strong the financials of the company are.
As a part of that analysis, we will analyse the P&L first.