PROFIT AND LOSS STATEMENT

Financial Statements are written records that convey the business activities and the financial performance of a company. There are three types of financial statements-

1. Profit and Loss Statement/ Income Statement
2. Balance Sheet
3. Cash Flow Statement

In this blog, we will look into the Profit and Loss Statement. The Profit and Loss statement presents information on the financial results of a company’s business activities over a while. The income statement communicates how much revenue the company generated during a period and what costs it incurred in connection with generating that revenue. Analysts are interested in them because equity markets often reward relatively high or low- earnings growth companies with above-average or below-average valuations, respectively, and because inputs into valuation models often include estimates of earnings.

There are two types of financial statements, Standalone Financial Statements, and Consolidated Financial Statements

A well-established company often has various subsidiaries, each subsidiary maintains its accounting books and financial statements. These are known as Standalone Financial Statements. When the financial statements of the parent and its subsidiaries are combined line by line summing up the revenues, expenses, assets, and liabilities, the resulting financial statements are called consolidated financial statements.

As an example, the Statement of Standalone Profit and Loss of DMART is shown above.

As clearly stated in the header, the statement we are analyzing is an annual one, for the period starting from 31st March 2018 to 31st March 2019. This simply means we could have analyzed recent and hence more relevant data only if we had waited for another week.

Another thing to notice is that all the figures quoted are in crores.

INCOME

Revenue from operations

Revenue refers to the income earned by the business from its business activities. It is the top line or gross income figure from which costs are subtracted to determine net income.

Revenue from operations states the income generated from the daily core business activities. As DMART is a chain of retail stores, the core business activity here includes the sale of goods from these stores. The products on offer with their percent contributions to revenue are — Foods (51.25%) , Non-foods (20.46%) and General Merchandise and Apparel (28.29%).

To know how they arrived at the total income from the revenue from operations we need to check the associated note i.e. (Note 25).

In the notes we see,

1. Sale of Goods- It is the revenue generated by the sale of goods from the stores. For 2018–2019 this was recorded as Rs. 21816.38 crores
2. Sale of Goods on Approval Basis- At times a company might send samples on a trial basis, this means that the customer can try the product and decide to retain or return it later. When and if the customer decides to retain the products this revenue will be moved to the Sale of Goods. For 2018–2019 this was recorded as Rs. 75.27 crores.
3. Cost of Goods Sold on Approval basis- The goods sold on an approval basis are treated differently and hence their cost is deducted in the Income part of the Profit Loss Statement itself. This was recorded as Rs. 63.67 crores
4. Tax- This is the amount paid by the company to the government. This is referred to as sales tax. For 2018–2019 this was recorded as Rs. 1946.3 crores.
5. Other Operating Income- This is the income earned through the sale of services that accompany the core activities of the company. For 2018–2019 this was recorded as Rs. 34.70 crores. This will always be very small as compared to Sale of Goods.

Revenue from Operations stands at Rs. 19916.25 crores.

Other Income-

Other income includes income which is not related to the main activities provided by the business. This includes income generated from 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 further investigation. The breakup can be seen in Note 26 above.

Other Income Stands at Rs. 51.41 crores.

Total Income = Revenue from Operations + Other Income = Rs. 19967.66 crores.

EXPENSES

Purchase of Stock in Trade- This refers to the money spent by the business to buy finished products. Stock in trade refers to the goods sold by the company to generate revenue.

This stands at Rs. 17409.2 crores.

Change in inventories of Stock in Trade-

It the difference between the value of stock present at the end of the fiscal year and the start of the fiscal year. This stands at Rs. 429.18 crores. This means that DMART has Rs. 429.18 crores of inventory left with them. As this number is positive this means some of the new purchases were not sold and hence their cost should be counted in the next fiscal year. The cost of objects sold = Opening Stock Inventory + Purchases — Closing Stock Inventory

= Purchases — (Closing Stock Inventory — Opening Stock Inventory)

= Purchases — Change in Inventory

Employee Benefits Expense-

This includes expenses incurred in terms of the salaries paid, contribution towards provident funds, and other employee welfare expenses.

Expense on employee stock option scheme- These give a right to the employees to buy the stock of the company at a specified price. The employee benefits if the price of the stock rises above the option exercise price.

This stands at Rs. 335.03 crores.

Finance Cost-

Finance cost is the interest and other costs paid by the company to its lenders. These lenders could be banks or private lenders. A small amount of finance cost indicates less borrowing which is a positive sign for any business, but this can also indicate a dearth of opportunities for expansion.

Total Finance cost stands at Rs. 47.15 crores.

Depreciation and amortization expense-

To understand the difference between depreciation and amortization we need to know the difference between tangible and intangible assets. Tangible assets have a physical form and provide economic benefit to the company. This can include land, machines, buildings, etc. On the other hand, tangible assets do not have a physical form, but they too provide economic benefit. These include patents, copyright, etc.

Every asset has a period in which it can prove to be beneficial to the company, this is because of the simple reason that with time things deteriorate. This is very similar to how over time people grow distant and interpersonal relationships are ruined. For example, the useful period of a machine can be 5 years. Now to discount this price in a singular fiscal year won’t be right as it is providing us with economic returns for the next 5 years. Hence an amount equal to the (price of the asset/lifetime) is depreciated each year for the period of its lifetime.

For tangible assets, this is known as depreciation and for intangible assets, it’s called amortization.

The Depreciation and Amortization expense stands at Rs. 198.80 crores.

Other Expenses-

From the notes, it is quite clear that majorly the other expenses include maintenance, repairs, upkeep, and administrative expenses.

The total stands at Rs. 959.10 crores.

EXPENSE = Purchase of Stock in Trade — Change in inventories of Stock in Trade + Employee Benefits Expense + Finance Cost + Depreciation and amortization expense + Other Expenses = Rs. 18520.02 crores.

Profit Before Tax = INCOME — EXPENSE = Rs. 1447.64 crores

Tax Expense-

The actual profit earned by the company would be obtained after its tax obligations are fulfilled.

Current tax is the tax paid by the company in the given year, also, there are other taxes that the company pays. All these taxes are explained in detail in the annual report.

The total income tax expenses stand at Rs. 511.29 crores.

Profit After Tax (PAT)

After deducting the income tax expense from the profit before tax we get Rs. 935.08 crores. This is the amount that the company has earned after all the expenses are paid for and

Other Comprehensive Income-

Other Comprehensive Income refers to items of income and expenses that are not recognized as a part of the profit and loss account. In simple words, it is a gain or loss that has not been realized. For example, gain or loss on an investment can be realized when it is sold. These include unrealized gains on bonds, pension plans, etc. Net comprehensive income stands are Rs. 1.27 crores.

Hence, the total income = Rs. 936.35 crores

Earning Per Share-

BASIC EPS-

Basic Earning per share is the amount of profit that can be allocated to each share issued by it. The formula to calculate Basic EPS is given as,

BASIC EPS= (NET INCOME / WEIGHTED AVERAGE NUMBER OF SHARES

OUTSTANDING)

Note- The general form of the numerator is (Net Income-Preferred Dividends). This has been omitted as it was not relevant for DMART.

Weighted Average Number of Shares-

The weighted average number of shares outstanding is a time weighting of common shares outstanding. For example, assume a company began the year with 2,000,000 common shares outstanding and repurchased 100,000 common shares on 1 July. The weighted average number of common shares outstanding would be the sum of 2,000,000 shares × 1/2 year + 1,900,000 shares × 1/2 year, or 1,950,000 shares. So the company would use 1,950,000 shares as the weighted average number of shares in calculating its basic EPS.

The weighted average number of shares= 624,084,486

Hence Basic EPS= 936.35 crores/624084486

= Rs. 15

DILUTED EPS-

Diluted EPS is a calculation used to gauge the quality of a company’s earnings per share (EPS) if all convertible securities were exercised. In this case, as recorded earlier the company has given out some Employee Stock Options. Hence Diluted EPS is calculated with the assumption that these rights are exercised. This will lead to an increase in the number of outstanding shares.

Hence the weighted average number of shares, in this case, = 633,056,610

Diluted EPS= (936.35crores/633056610)

= Rs. 14.79

CONCLUSION

Hopefully, the Profit and Loss Statement is making more sense now, we have only discussed what the individual lines mean in a profit and loss statement and have not analyzed these numbers yet. The three financial statements are closely connected and we will be taking these up in our future blogs.