Chapter 10: NISM-XV Exam Prep
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Day 44: NISM-XV Module 3 — Financial Statements
The numbers behind every company — and how to read them for the exam
2 min read
📖 Robert's Annual Report
Robert's Tea Ventures Ltd is now listed. SEBI regulations require an annual report — and it's 200+ pages! His CA said: "Three things matter: P&L, Balance Sheet, Cash Flow. Understand these three and you understand the entire company."
The exam tests exactly these three. And the red flags buried within them. 📊
Robert's Tea Ventures Ltd is now listed. SEBI regulations require an annual report — and it's 200+ pages! His CA said: "Three things matter: P&L, Balance Sheet, Cash Flow. Understand these three and you understand the entire company."
The exam tests exactly these three. And the red flags buried within them. 📊
P&L Statement — The Profit Ladder
Revenue (Sales)
− Cost of Goods Sold (COGS)
= Gross Profit
− Operating Expenses (salaries, rent, marketing)
= EBITDA (Earnings Before Interest, Tax, Depreciation, Amortisation)
− Depreciation & Amortisation
= EBIT (Operating Profit)
− Interest Expense
= EBT (Earnings Before Tax)
− Tax
= Net Profit (PAT) ← The bottom line everyone watches!
− Cost of Goods Sold (COGS)
= Gross Profit
− Operating Expenses (salaries, rent, marketing)
= EBITDA (Earnings Before Interest, Tax, Depreciation, Amortisation)
− Depreciation & Amortisation
= EBIT (Operating Profit)
− Interest Expense
= EBT (Earnings Before Tax)
− Tax
= Net Profit (PAT) ← The bottom line everyone watches!
Key P&L Ratios
| Ratio | Formula | Good Value |
|---|---|---|
| Gross Margin | Gross Profit / Revenue × 100 | 30%+ good |
| EBITDA Margin | EBITDA / Revenue × 100 | 15%+ good |
| Net Profit Margin | Net Profit / Revenue × 100 | 10%+ good |
| EPS | Net Profit / Shares Outstanding | Growing YoY |
Balance Sheet — Snapshot of Health
ASSETS (What company owns)
- Fixed: Land, buildings, machinery
- Current: Inventory, receivables, cash
- Intangible: Brand value, patents
LIABILITIES (What company owes)
- Long-term Debt: Bank loans, bonds
- Current Liabilities: Payables, short-term loans
- Shareholders' Equity: Residual ownership
Red Flags in Financial Statements
⚠️ Run from these warning signs!
🚩 Revenue growing but cash flow declining → Revenue may be accounting fiction
🚩 Receivables growing faster than revenue → Customers not paying!
🚩 Promoter pledging shares → Cash crunch, forced selling risk
🚩 Frequent auditor changes → Governance red flag
🚩 Large "other income" propping up profits → Core business weak
🚩 Unusually high related-party transactions → Money siphoning?
🚩 Revenue growing but cash flow declining → Revenue may be accounting fiction
🚩 Receivables growing faster than revenue → Customers not paying!
🚩 Promoter pledging shares → Cash crunch, forced selling risk
🚩 Frequent auditor changes → Governance red flag
🚩 Large "other income" propping up profits → Core business weak
🚩 Unusually high related-party transactions → Money siphoning?
🎯 Takeaway:
P&L: revenue to profit ladder. Balance Sheet: assets = liabilities + equity. Cash Flow OCF must be positive. Red flags: receivables growing fast, promoter pledging, auditor changes. Use Screener.in for free number-crunching. Tomorrow: Derivatives!
P&L: revenue to profit ladder. Balance Sheet: assets = liabilities + equity. Cash Flow OCF must be positive. Red flags: receivables growing fast, promoter pledging, auditor changes. Use Screener.in for free number-crunching. Tomorrow: Derivatives!