Happy New Year in advance :) !
I was humbled by the response to my past article, READ BALANCE SHEET IN 3 SIMPLE STEPS!I had highlighted how you can just follow these 3 steps and analyse, interpret and comment on the Balance Sheet:
However, many people asked for an explanation with practical examples. Here, I have taken an actual Balance Sheet of a listed company, Fortis Healthcare Ltd, for 5 years to illustrate how this can be done!
Analysis of Balance Sheet: Explained in detail with an example of Fortis Healthcare Ltd: Consolidated Balance Sheet (Figures in Rs. Crore)
| � |
Mar '14 |
Mar '13 |
Mar '12 |
Mar '11 |
Mar '10 |
|
Sources Of Funds |
� | � | � | � | |
|
Total Share Capital |
462.79 |
1,079.53 |
409.51 |
409.43 |
321.65 |
|
Equity Share Capital |
462.79 |
405.21 |
405.18 |
405.10 |
317.32 |
|
Share Application Money |
0.00 |
0.00 |
0.00 |
6.57 |
0.00 |
|
Preference Share Capital |
0.00 |
674.33 |
4.33 |
4.33 |
4.33 |
|
Init. Contribution Settler |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
Preference Share Application Money |
670.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
Employee Stock Option |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
Reserves |
3,819.58 |
3,301.34 |
2,848.33 |
2,517.40 |
1,191.50 |
|
Revaluation Reserves |
0.00 |
0.00 |
0.00 |
351.97 |
373.80 |
|
Networth |
4,282.37 |
4,380.87 |
3,257.84 |
3,285.37 |
1,886.95 |
|
Secured Loans |
567.99 |
2,546.99 |
1,944.63 |
617.03 |
3,045.37 |
|
Unsecured Loans |
1,138.32 |
2,616.72 |
4,564.65 |
471.30 |
2,425.27 |
|
Total Debt |
1,706.31 |
5,163.71 |
6,509.28 |
1,088.33 |
5,470.64 |
|
Minority Interest |
139.26 |
1,021.22 |
830.84 |
30.36 |
34.49 |
|
Policy Holders Funds |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
Group Share in Joint Venture |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
Total Liabilities |
6,127.94 |
10,565.80 |
10,597.96 |
4,404.06 |
7,392.08 |
| � |
Mar '14 |
Mar '13 |
Mar '12 |
Mar '11 |
Mar '10 |
|
Application Of Funds |
� | � | � | � | |
|
Gross Block |
5,002.23 |
10,166.43 |
10,143.16 |
3,016.23 |
2,502.98 |
|
Less: Accum. Depreciation |
855.45 |
892.34 |
961.85 |
492.37 |
401.05 |
|
Net Block |
4,146.78 |
9,274.09 |
9,181.31 |
2,523.86 |
2,101.93 |
|
Capital Work in Progress |
147.11 |
243.79 |
567.52 |
270.80 |
425.61 |
|
Investments |
1,817.38 |
1,187.44 |
241.17 |
90.15 |
3,448.49 |
|
Inventories |
61.98 |
92.50 |
79.92 |
26.33 |
23.78 |
|
Sundry Debtors |
442.30 |
662.78 |
546.67 |
195.23 |
156.67 |
|
Cash and Bank Balance |
258.54 |
511.70 |
414.91 |
87.84 |
48.15 |
|
Total Current Assets |
762.82 |
1,266.98 |
1,041.50 |
309.40 |
228.60 |
|
Loans and Advances |
1,011.27 |
1,608.97 |
1,396.28 |
1,495.20 |
227.50 |
|
Fixed Deposits |
0.00 |
0.00 |
0.00 |
75.79 |
1,263.18 |
|
Total CA, Loans & Advances |
1,774.09 |
2,875.95 |
2,437.78 |
1,880.39 |
1,719.28 |
|
Deffered Credit |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
Current Liabilities |
997.53 |
2,859.52 |
1,740.22 |
328.23 |
290.47 |
|
Provisions |
89.89 |
155.95 |
91.15 |
35.41 |
79.21 |
|
Total CL & Provisions |
1,087.42 |
3,015.47 |
1,831.37 |
363.64 |
369.68 |
|
Net Current Assets |
686.67 |
-139.52 |
606.41 |
1,516.75 |
1,349.60 |
|
Minority Interest |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
Group Share in Joint Venture |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
|
Miscellaneous Expenses |
0.00 |
0.00 |
1.54 |
2.50 |
66.45 |
|
Total Assets |
6,797.94 |
10,565.80 |
10,597.95 |
4,404.06 |
7,392.08 |
|
|
|||||
|
Contingent Liabilities |
373.89 |
521.31 |
404.14 |
159.68 |
317.40 |
|
Book Value (Rs) |
92.53 |
91.47 |
80.30 |
72.14 |
47.55 |
Source: www.moneycontrol.com
STEPS FOR OUR ANALYSIS:
1. COMPOSITION:
Check the video for context here:
NOW,
Analyze the composition of Equity, Liabilities or Assets. You can look at Equity for example. As on March 31, 2014, it was Rs. 4,282 crore. It was comprised of Equity Share Capital, Pref Share Application Money, Reserves and Surplus. Now, you may have to probe the Pref Share Application Money further. You will have to analyse what are reserves made up of, are there any revaluation reserves, any free reserves etc.
Similarly you will have to analyse the composition of Asset side. Are there more fixed assets, or current assets. This may be driven by the stage of the business, the business model or even the industry in which the company operates. For example, a hospital owing-operating company (like Fortis) may have fixed assets as the main component of the asset side, whereas a Services company could be asset light i.e. It may have more of Current Assets (in the form of Work in Progress, Receivables, Cash) rather than heavy fixed assets.
You may also analyse the composition of current assets further to understand whether it consists of more inventory (could be slow-moving or fast-moving), debtors or cash!
So, in short analyse the composition and go deeper to understand the reasons / drivers.
2. COMPARISON:
Check the video for context here:
NOW,
Here, compare how the items are changing year on year and understand the reasons. For example, check Equity. You can notice that the Equity has increased from Rs. 1,887 crore as on FY2010 to Rs. 4,282 crore as on FY2014. What are the reasons? 1. Look at reserves: They have gone up from Rs. 1,191 crore as on FY 2010 to Rs. 3,820 crore. Understand if retained profits are the only reason or Securities Premium (an issue of shares) is driving this increase. Also note that the comparison can now give you the answer to why preference share application money lies there in FY14. It is almost same amount, which was lying in the form of Preference Capital earlier. It is possible that these Preference Shares may have been redeemed recently and the company has issued new preference shares again. It needs to be understood whether they have been issued to the same investors or not.
A comparison of Fixed Assets year-on-year can help you understand whether the company has done a big capital expenditure or acquisition or even sale of business division. Check Fortis example again: Fixed Asset gross block increased from Rs. 3,016 crore in FY11 to Rs. 10,143 crore. Analyse the reason for the same. Is it an acquisition? Note that the gross block has reduced to Rs. 5,002 crore from Rs. 10,166 crore. Is it because they sold some business division or large asset? Or is it because there was a large impairment?
Basically, the comparison gives you some more clues to understand how the business events and performance may have affected the Financial position of the company. These insights are very critical for business analysts and investors.
3. RELATIONSHIPS:
Check the video for context here:
NOW,
Lastly, analysing relationships i.e. Relationship of one item on the Balance Sheet with another item. Let�s try and understand the Debt to Equity Ratio of Fortis Healthcare (Consolidated). Check how it was almost 3:1 in FY10, came down to 2:1 in FY12 and finally to 0.40:1 in FY14. There are two reasons for the same. The equity has gone up and the debt has reduced i.e. the denominator has gone up and numerator has reduced. You can now understand how debt has come down. Is it that the debt has been repaid? Does it have any connection to the scale of the business etc.?
Similarly, you may want to understand the relationship of long term funds with long term assets. Or short term funds with short term assets. Or to what extent do fixed assets cover the long term debt in the business etc.
You can go few steps ahead to understand the relationships between an item on the Balance Sheet and that from Profit & Loss Account.
I hope the example clarifies the steps and make the actual analysis easier. Repeating my last statement, analysis of Balance Sheet is an important skill that is required throughout our professional careers!
For learning how to read historical financials and preparing financial projections using MS Excel, do consider signing up for our�Specialized Program
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