How to Read Financial Statements of a Company is the first episode of Stock Market Educational series - Stocks for Beginners.

In this first episode of Stocks for Beginners, we spoke how to read financials statements of a company such as Profit and Loss statement of a Company.

Watch this episode on Youtube : https://youtu.be/4fxC2_XnfQI

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What's in the episode?

It is said many time whole invest that you should choose a company, look at its fundamentals and then invest for the longer horizon. 

If we look at the income statement (profit and loss statement) of a company, it tells us how the company performed in the past quarter or in the past financial year.
The first thing in the profit and loss statement is the revenue. 

The revenue tells us the amount of sales a company made in the past quarter/financial year. It tells us the amount the company sold goods at. 

After revenue comes expense. Taking the example of a company that makes pens. The company sold Rs 100 worth good in the past quarter, so its revenue is Rs 100. Expense is the cost incurred by the company to make those goods. Consider that the cost incurred by the company to make pens is Rs 50. There is another important expense called Employee cost.

Now after removing the sale and expense you get an amount which is called Operating profit. In this case, it is Rs 50. To get this amount, you only have to see the amount used in the company's operations. The operating profit margin tells us what the company's operating margin has been. in this case, it is 50%. 

You have to compare the operating profit margin, of this quarter or financial year, to the previous quarter to see how efficiently the company is utilising its resources.

The next thing is interest or interest expense. The pen making company which we spoke about had a sale of Rs 100 and had borrowed a debt of Rs 1000. The company has to pay a 10% interest. In this case, the interest expense is Rs 100. Lower the debt taken, lower is the interest rate. After removing the Rs 10, the company's operating profit is Rs 40.

The next thing comes depreciation. A company bought a company at Rs 100, which had a life of 10 years, every year its value decreases by Rs 10. So now the profit is Rs 30. There is other income which comes from everything other than the company's core business. Consider is that is Rs 10, then the company's profit is Rs 40.