Module 3 Fundamental Analysis

Chapter 4

Understanding the P&L Statement (Part 1)


4.1 – Overview of the financial statements

You can think about the financial statements from two different angles:

  1. From the maker’s perspective
  2. From the user’s perspective

A maker prepares the financial statements. He is typically a person with an accounting background. His job involves preparing ledger entries, matching bills and receipts, tallying the inflows versus the outflows, auditing etc. The final objective of the is to prepare transparent financial statements which best represents the true financial position of the company. To prepare such a financial statement certain skills are required, usually these skills are developed through the rigor of a Chartered Accountant’s training program.

The user on the other hand just needs to be in a position to understand what the maker has prepared. He is just the user of the financial statements. He need not really know the details of the journal entries or the audit procedure. His main concern is to read what is being stated and use it to make his decisions.

To put this in context, think about Google. Most of us do not understand Google’s complex search engine algorithm that runs in the backend, however we all know how to use Google effectively. Such is the distinction between the maker and the user of financial statements.

A common misconception amongst the market participants is that, they believe the fundamental analyst needs to be thorough with concepts of financial statement preparation. While knowing this certainly helps, it is not really required. To be a fundamental analyst, one just needs to be the user and not the maker of the financial statements.

There are three main financial statements that a company showcases to represent its performance.

  1. The Profit and Loss statement
  2. The Balance Sheet
  3. The Cash flow statement

Over the next few chapters we will understand each of these statements from the user’s perspective.

4.2 – The Profit and Loss statement

The Profit and Loss statement is also popularly referred to as the P&L statement, Income Statement, Statement of Operations, and Statement of Earnings. The Profit and Loss statement shows what has transpired during a time period.  The P&L statement reports information on:

  1. The revenue of the company for the given period (yearly or quarterly)
  2. The expenses incurred to generate the revenues
  3. Tax and depreciation
  4. The earnings per share number

From my experience, the financial statements are best understood by looking at the actual statement and figuring out the information. Hence, here is the P&L statement of Amara Raja Batteries Limited (ARBL). Let us understand each and every line item.


4.3 – The Top Line of the company (Revenue)

You may have heard analysts talk about the top line of a company. When they do so, they are referring to the revenue side of the P&L statement. The revenue side is the first set of numbers the company presents in the P&L.


Before we start understanding the revenue side, let us notice a few things mentioned on the header of the P&L statement:


The header clearly states:

  1. The statement of P&L for the year ending March 31, 2014, hence this is an annual statement and not a quarterly statement. Also, since it is as of March 31st 2014 it is evident that the statement is for the Financial Year 2013 – 2014 or simply it can be referred to as the FY14 numbers
  2. All currency is denominated in Rupee Million. Note – 1 Million Rupees is equal to Ten Lakh Rupees. It is upto the company’s discretion to decide which unit they would prefer to express their numbers in
  3. The particulars show all the main headings of the statement. Any associated note to the particulars is present in the note section (also called the schedule). An associated number is assigned to the note (Note Number)
  4. By default when companies report the numbers in the financial statement they present the current year number on the left most column and the previous year number to the right. In this case the numbers are for FY14 (latest) and FY13 (previous)

The first line item on the revenue side is called the Sale of Products.

Since we know we are dealing with a batteries company, clearly sale of products means the Rupee value of all the battery sales the company has sold during FY14. The sales stand at Rs.38,041,270,000/- or about Rs.3,804 Crore.  The company sold batteries worth Rs.3,294 Cr in the previous financial year i.e FY13.

Please note, I will restate all the numbers in Rupee Crore as I believe this is more intuitive to understand.

The next line item is the excise duty. This is the amount (Rs.400 Crs) the company would pay to the government; hence the revenue has to be adjusted.

The revenue adjusted after the excise duty is the net sales of the company. The net sales of ARBL is Rs.3403 Crs for FY14. The same was Rs.2943 Crs for FY13.

Apart from the sale of products, the company also draws revenue from services. This could probably be in the form of annual battery maintenance. The revenue from sale of services stands at Rs.30.9Crs for FY14.

The company also includes “other operating revenues” at Rs.2.1crs.This could be revenues through the sale of products or services that is incidental to the core operations of the company.

Finally the revenue from Sale of products + Sale of services + Other operating revenues sums up to give the total operating revenue of the company. This is reported at Rs.3436 Crs for FY14 and Rs.2959Crs for FY13. Interesting, there is a note; numbered 17 associated with “Net Revenue from Operations” which will help us inspect this aspect further.

Do recall, in the previous chapter we had discussed about notes and schedules of the financial statement.

The following snapshot gives the details of note 17.


Clearly, the notes give a more detailed analysis of the split up of revenues from operations (does not include other income details). As you can see under the particulars, section ‘a’ talks about the split up under sales of products.

  1. Sale of storage batteries in the form of finished goods for the year FY14 is Rs.3523 Crs versus Rs.3036 Crs in FY13
  2. Sale of Storage batteries (stock in trade) is Rs.208 Crs in FY14 versus 149 Crs. Stock in trade refers to finished goods of previous financial year being sold in this financial year
  3. Sale of home UPS (stock in goods) is at Rs.71 Crs in FY14 versus Rs.109 Crs FY13
  4. Net sales from sales of products adjusted for excise duty amounts to Rs.3403 Crs, which matches with the number reported in the P&L statement
  5. Likewise you can notice the split up for revenue from services. The revenue number of Rs.30.9 tallies with number reported in the P&L statement
  6. In the note, the company says the “Sale of Process Scrap” generated revenue of Rs.2.1 Cr. Note that the sale of process scrap is incidental to the operations of the company, hence reported as ‘Other operating revenue”.
  7. Adding up all the revenue streams of the company i.e Rs.3403 Crs+ Rs.30.9 Crs +Rs.2.1 Crs gets us the Net revenue from operations = Rs.3436 Crs.
  8. You can also find similar split up for FY13

If you notice the P&L statement, apart from net revenue from operations ARBL also reports ‘Other Income’ of Rs.45.5 Crs. Note number 18 reproduced below explains what the other income is all about.


As we can see the other income includes income that is not related to the main business of the company. It includes interest on bank deposits, dividends, insurance claims, royalty income etc. Usually the other income forms (and it should) a small portion of the total income. A large ‘other income’ usually draws a red flag and it would demand a further investigation.

So adding up revenue from operations (Rs.3436 Crs) and other income (Rs.45 Crs), we have the total revenue of for FY14 at Rs.3482Crs.

Key takeaways from this chapter

  1. The financial statement provides information and conveys the financial position of the company
  2. A complete set of financial statements include the Profit & Loss Account, Balance Sheet and Cash Flow Statement
  3. A fundamental Analyst is a user of financial statement, and he just needs to know what the maker of the financial statements states
  4. The profit and loss statement gives the profitability of the company for the year under consideration
  5. The P&L statement is an estimate, as the company can revise the numbers at a later point. Also by default companies publish data for the current year and the previous year, side by side
  6. The revenue side of the P&L is also called the top line of the company
  7. Revenue from operations is the main source of revenue for the company
  8. Other operating income includes revenue incidental to the business
  9. The other income includes revenue from non operating sources
  10. The sum of revenue from operations (net of duty), other operating income, and other incomes gives the ‘Net Revenue from Operations’


  1. sugumar says:

    Again thanks for the wonderful explanation :).
    You said ” Usually the other income forms (and it should) a small portion of the total income. A large ‘other income’ usually draws a red flag and it would demand a further investigation” .Why should the “larger other income” be viewed seriously?

    • Karthik Rangappa says:

      That is because a well managed company should generate revenues through core operations and not really through ‘Other’ sources. Hence it always makes sense to check the schedule of other income.

    • jvain2005 says:

      Any public listed company needs to clearly state the intent of the business and most of the figures or majority of the revenue should be from that intent. In case of AMRON it should be related to batteries. Any “other” head becomes catch all bucket and any wrong doing of the company to generate revenue or the wrong doings of the promotors can easily be hidden in that bucket. Most importantly, “other” head will not explain the nature of the business company did to generate that revenue and that in itself should raise red flag. Anything that you do not understand from a company, the company should be avoided. Hence, “other income” should be as low as possible.

      • Karthik Rangappa says:


        Also, Other income includes income from rent, interest, dividends. So always make sure to check the schedule of other income.

  2. Durgesh kumar says:

    How can we justify the statement ,if it is manipulated or on higher side

    • Karthik Rangappa says:

      You just need to cross check the numbers across the 3 financial statements. Also, once you develop some experience with regard to reading the statements, you will get a hang of identifying financial frauds.

  3. Durgesh kumar says:

    Can u explain stock in trade concept ….

  4. Durgesh kumar says:

    Can u explain stock in trade concept

  5. Ranjeet46 says:

    Respected sir,
    As i can see from the snapshots provided for the other expenses column as given in note 18 of this financial statement, i can see that the other income for the current financial year (fy14) is less by 10 crore with regard to the previous financial year:. What are we to understand by this difference?

    • Karthik Rangappa says:

      Other income is income mainly from dividends, rental, and interest…all of which are non operational incomes. So lesser the value of other income better it is.

  6. kjgaurav says:

    In Key takeaways- the 10th point – ‘Net Revenue from Operations’ should not include other Income, and i think should be corrected. Please let me know if I am wrong.

    • Shubhra says:

      It is ‘Other Operating Income’ not ‘Other income’ . It is an Operational Income and not the Income from other sources. I think it is correct.

      • Karthik Rangappa says:

        Other income is due to non operational activity – like rental income or dividends from investment….all income from operational activity is termed as ‘Revenue from Operations’.

  7. civils.aditya says:

    I tried to see the price of ARBL on NSE but could not get. Then I searched for ‘Amara Raja Batteries Limited’ and got it with symbol ‘AMARAJABAT’. Is the symbol changed from ARBL to AMARAJABAT or am I going wrong somewhere?

    • Karthik Rangappa says:

      The symbol has always been AMARAJABAT, but in the module for some reason I have used ARBL…sorry if this created any confusion.

  8. ajay says:

    Hi Karthik,
    Thanks a lot for sharing information in a lucid manner.
    However, I would like to know the source from where you have taken the P&L for ARBL. Because I can’t find the same line items on ex. moneycontrol as I see in your snapshots.

  9. ajay says:

    Another thing, pl efer to the attached snip.
    1.What are atock adjustments & their impact?
    2.I also see misc expenses much more than employee costs! I wish to know the details of misc expenses (no notes are available on moneycontrol P&Ls)
    3. What are preoperative exp capitalised?

    • Karthik Rangappa says:

      Ajay – I would suggest you do not look at moneycontrol. Its always better to look at the Annual Reports directly…you get more information with lot of clarity.

      Stock adjustments are mainly to do with adjusting previous year inventory carried forward to current year. Some companies treat this a top line, hence added on the revenue side.

  10. priya says:

    Waste. Even a child knows

  11. RK kumar says:

    hi karthik, ril’s q3 was beating street estimates but the day before result stock started to crack,corrected sharply from 1080 to 1040 and after the result beaten down to 1000 range may be due nifty management,call writing and expiry pressure then after reaching 1015 post expiry its downward journey resumed now it is near 960 and i believe it may reach 940 and 920 soon as nifty is also weak and its weight age on nifty where as tata steel’s loss mounted q3 loss – 2000 cr instead of street expectation of – 1000 cr but stock rallied more than 15 points post results, why ril’s good result over looked and ts rallied ,how can we trust fundamental analysis and do operators exist in Indian stock market?

    • Karthik Rangappa says:

      There are couple of things to watch out for when the results come out –

      1) Are the results better than expectation or worst or did it meet expectations?
      2) If the results are better, can it sustain for the coming quarters?
      3) If it can sustain, what are the headwinds? Does the company have a realistic approach to deal with it?
      4) Guidance for the future quarters

      The stock price is a function of all this and more…and not just the quarterly results.


    suppose a company lists its 40% share in the stock market. and from initial round of selling the company get the fund of say 1 crore. but now what? as now these 40% share belongs to the trader and trading is done between the traders.. so if say the price of the stock get high, how does the company profit from this because these trading is happening between the traders so the money goes from one trader to another.. so how can a company profit from there stocks getting higher?

    • Karthik Rangappa says:

      Once the stock gets listed, the stock price dictates the valuation for all shareholders. Higher the stock price, higher the valuation, and higher the net wroth of shareholders including the promoters.

  13. Jeswin Joy says:


    This is an incredible place to be. I haven’t received this kind of clarity in concepts and detailed explanation from anywhere else. You are doing awesome work to educate non-finance guys like me. Thank you so much for sharing this priceless information with us. Keep up the good work and dedication. Wish you all the best in life, investing and business.

  14. garg10may says:

    The modules are really good, I am going through almost all of them. Previously I detested financial statements and maybe feared them. But now I am enjoying the same and looking forward for learning more and more.

    Can you give an example of financial fraud, why I am asking so is, I don’t think we need to be concerned about frauds since these are audited and if the company is really doing fraud it won’t be detectable so easily. Like is case of Satyam why nobody was able to detect them, so many people might be reading there ARs.

    • Karthik Rangappa says:

      I agree, but few simple checks and asking yourself few basic questions why reading AR helps. For example Satyam had debt on their books, one may have asked why the company has debt while their peers dint. Usually questions like this leads you to identifying such frauds. However I must tell you, this is easier said than done!

  15. sammandar khan says:

    What is the mean of note numbers here 18, 19, 20, 20 ?

  16. sameerkhan says:

    Hi Karthik sir
    when the products sales are 3804 then what is the mean again that income “The company also includes “other operating revenues” at Rs.2.1crs.This could be revenues through the sale of products or services that is incidental to the core operations of the company.”


  17. someonesceptic says:

    Hi Karthik,
    Expense and revenue numbers of 2013 in the annual report 0f 2013(AMARAJABAT) do not match with expense and revenue numbers of 2013 in the annual report 0f 2014. Is it some mistake made by auditors or an amendment?

  18. Anurag Vatipally says:

    Thank you for taking the time in educating us. Very well written and easy to understand. My question is how do I transfer all the data from the APR into excel and how do I create a template for analysing the data. Do you have any suggestions on how to create a template through which I can analyze and track the past and present Financial performance of a company.

    • Karthik Rangappa says:

      Anurag, there is no option but to do the old fashioned ‘data entry’ work here. The problem is there are no ‘free’ online resources which give out the right data. The rest of the things you are talking about is core to financial modelling. We will discuss this when we take up the same.

      Good luck.

  19. Gowtham says:

    For I see you have given some rating, How can I list all the rated stocks

    • Karthik Rangappa says:

      No, I’ve not really rated any stocks at rate star. Do you see my name there? If yes, can you please share the link here?

      • Gowtham says:

        I mean, Not you, some rating from Zerodha, I see out of 99 stocks, for example coal india is rated as 46/99, infosys at 30/99.
        You can visit ratestar and visit any of these stocks and you will see rating there. I want the complete list of that.

  20. Sivakumar says:

    Recently I hv. registered in zerodha. the varsity is awesome. n very useful . Thank U sir. n pl. keep it up , see the company’ s goodwill increase only by doing service like this. people will automatically come to zerodha n we will also recommend zerodha to our friends. I hv. searched yr. peer companies before signing up . U look very reasonable.

  21. amit says:

    nice explanation…keeping it simple is a masterstroke ….

  22. omkar shende says:

    sir why we dont post plant and machinery on profit and loss a/c debit side because purchase of that asset is our expenditure please ans.

  23. hemanshi g says:

    what is mean by excise duty?

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