This article is the continuation of Part 1 – DON’T INVEST IF YOU DON’T KNOW THIS. In this article let us learn about the quantitative part which involves the analysis of company numbers using its financial statements.
If I want to invest in a company, the first thing I do is Qualitative Analysis. Later on, I will check the past performance of that company using financial statements. If I found that the company is doing well, I will wait for the suitable price levels to invest.
Financial Statements plays major role in quantitative analysis. This Statements includes
- Balance Sheet
- Income Statement
- Cash Flow Statements
The Balance Sheet gives information about Assets and Liabilities. If you want to read more about assets and liabilities you can check this link Assets and Liabilities.
Assets column includes information about Fixed assets and Current assets. Whereas Liabilities includes Current liabilities, Long Term Debt, Shareholders Equity.
In a balance sheet Assets should always match with Liabilities according to Double entry accounting rule.
For reference, I have attached the ITC balance sheet to this article you can check it out below.
Income statement ( Profit and Loss Statement) gives information about the revenues, expenses, Profit of the company.
I provided a snapshot of the ITC Income statement. In that, you can observe terms like operating costs, Profit before tax, Depreciation and amortization and a few more. Most of these terms are self-explanatory.
After analysing all these investors can come to know the performance of the business in that quarter. He can also compare it with the previous quarters to measure the growth or decline in revenues.
Cash Flow Statement
This is my favourite one. Whatever business you do, at the end of a quarter or a financial year what comes into count is “How much money got into your Pocket”. Using cash flow statement one can analyse that.
The cash flow statement gives information about Cash Flows of
- Operating Activities
- Investing Activities
- Financing Activities
Let us say a company sold machinery with a profit of 5 lakh rupees but the sale is done on credit. In this case, the income statement shows the profit of Rs.5 Lakhs but there will be no money with the company. Transactions like this will be mentioned in the Cash Flow Statement.
Quantitative analysts derive some useful ratios using the data in the balance sheet, income statement and cash flow statements. Ex- Liquidity, Solvency, Profitability, Debt Ratios.
By this article, we have covered all the steps in the Top-Down Analysis. You can read remaining parts by clicking this link LEARNING ZONE