This article mainly focuses on how to pick the right stocks for your investment money based on the Income Statements of the company. Here I took one company from the service sector(TCS) and one from the manufacturing sector(Maruti).
Any analysis or interpretation must be based on data from at least 5 years. I took Income statements from moneycontrol.com.Let's see only the Income head for both companies.
Income Part
Basically, we are searching for a company that gives us a consistent return on investment.
What we are searching for from the income statement?
Constant rise or growth in Gross revenue over the period of at least the last 5 years
No fluctuations in expenditures
Expenditure efficiency through process improvement techniques of the company
Data
Gross Revenue increased from 2017 to 2021 for TCS and we can safely assume the same is true for Maruti(2020 and 2021 suffered a dip because if covid)
We can ignore Excise/Service/other Levies because these are subsumed by GST. Excise was there till the second quarter of 2017(GST implemented in July 2017)
We see Total operating revenues also on the rise.
Both companies have constant other sources of income(around Rs.5000 for TCS and Rs.2500 for Maruti)
Total Revenues
Insights
We can only infer whether the company thrives to increase the revenue. This doesn't mean the company is in profit or loss.
We will have to correlate with Expenditure
More money comes in(Revenue) and less money goes out(Expenditure) = Profitable company
Expenditure
Have this thumb rule,
The service sector major expenditure will be Employee compensation whereas for the manufacturing sector will be COGS(Cost of Goods Sold)i.e Material consumed for the realises sales
So look for employee compensation for TCS
Data
Employee Compensation
Insight
We can't conclude expenditure is on the rise and they are inefficient.
We need how much percentage of revenue is consumed by employee compensation.
Employee compensation / Total revenue
% Employee compensation to Total Revenue
You can compare the same with its peers like Infosys, HCL etc.
One thing for sure is that TCS maintain its employee compensation proportion(around 48%) by increasing the revenue
We will take a look at Maruti(COGS)
COGS
Similarly, we will calculate how much COGS is consumed to total revenue
% COGS to Total Revenue
You can compare the same with its peers like Mahindra, Tata motors etc.
Maruti is finding ways to increase its revenue with minimal COGS
COGS are decreasing but revenues are maintained which is good
Terminologies in the Expenses account
Expenses head of TCS and Maruti
If you buy raw materials and convert them into finished goods(Mfg) - You put the purchase cost of raw material in the Cost of Material Consumed. eg. Maruti
If you buy finished goods and resell them to consumers(Trading), then it will be the Purchase of Stock in Trade. e.g.Aditya Birla Fashions and Retail
Any fee like consultation, legal, auditor etc, Softwares etc comes under Operating Expense and Direct expense.
The difference between opening and closing inventory for finished,semi-finished and stock in trade is called Changes in Inventories of FG, WIP and Stock-in-Trade
Employee compensation comes under Employee Benefit Expenses
Interest paid on the borrowed loan, bonds and other debt instruments comes under Finance Costs
You can't use any equipment or software for an indefinite period of time. We will have to repurchase the equipment or software. So set aside some amount for repurchase in future. This is called Depreciation. The same concept when applied to intangibles(like loans) is called Amortization.
Other expense is an aggregation of costs that are individually not material such as commission and brokerage, recruitment and training, entertainment, etc.
We will see taxes and some special insights from the income statements in general in the next article.