While investing, it is said many times
In fact, I have told you many times
While investing you should choose a company
You should look at its fundamentals and invest for the longer horizon
Now the most important question comes, how can I see the fundamentals of a company
How can I see the fundamentals of a company and then choose
How this company is fundamentally
Can this perform well in the coming time or not
Because of which a lot of people had demanded for us to bring about an educational series
In which we should teach you how we can see the fundamentals of a company
How we can read different fundamental reports
Apart from this what are the relevant ratios, using which
You can decide that the company you want to invest in
If that company will perform well in the coming time or not
I, Jagdeep Singh, welcome you to the Groww channel
Today we have brought the first video of the educational series
In which we are going to talk about how you can see the income statement of any company
So in the first video we are mainly going to talk about the income statement
So if we talk about income statement which we also call profit and loss statement
That tells us how a company, in the past quarter
Or in the past financial year, how it performed
This tells us that if a company made sales, what were its expenses
And after that what were the company's profits
So this performance becomes very important if we want to invest in any company
And these performances are known by the profit and loss statements
So it is very important for us to know how to look at the profit and loss statement
So now I will go to the profit and loss statement
So to look at the profit and loss statement, the first thing that you get in the statement
That is revenue
So revenue tells the amount of sales a company has made in the past quarter or in the past financial year
So topline, which we also call revenue
This tells us the amount the company sold goods at
The sales the company made, for the past quarters
Or for the financial years you're looking at the data for
So at the top is revenue
After revenue comes cost of goods sold
Which we also call expense
So in the profit and loss statement, whenever the company sells a product
Consider if I talk about a company that makes pens
The company sold Rs 100 worth products in the past 3 months or past quarter
Its revenue becomes Rs 100
But now the topic comes of cost of goods sold
Which we also call expense
So for this it is very important that if the company sold products for Rs 100
What was the expense of the company for selling Rs 100 worth goods
Now consider that the company's expense was Rs 50
So if I talk about this important number, there was a Rs 100 sales
Out of that there was a Rs 50 expense
Which we also call cost of goods sold
Apart from this there are other expense as well
Which is very important for a company and its operations
Like there is a very important cost, employee cost
Apart from this there are many important expenses
Which are used to run the company's operations
So all these expense come under cost of goods sold and under other expenses
Now after removing the expenses, consider the pen selling company I was talking about
The company made a sale of Rs 100
And the company's expenses was Rs 50
Now the profit that comes out after removing the sales and expenses
That comes out to be Rs 50
Which we call Operating Profit
So you get operating profit when you remove the expenses from the sales of a company
But here it is very important
You have to remove only those expense which are used in the company's operations
If the company makes pens
So you can only remove those expenses which are used in making pens
So after removing this Rs 50, if the company is left with Rs 50
That is their Operating profit
Now the topic comes of a very important ratio which we call operating profit margin
So operating profit margin tells us that
What has the company's operating margin been
Like the case I told you now
That out of Rs 50, consider that the company's expense was Rs 50
The company has RS 50 left
The company's operating profit margin comes out as 50%
So here, whenever we talk about operating profit margin
You have to compare the company's operating profit margin of that quarter
With the previous quarter
If you are talking about one year
You have to compare the operating profit margin to the previous year
Because operating profit margin tells you how efficiently the company is utilising its resources
And if a company's operating profit margin is increasing very well
There has been an efficiency in a company's operations
They have started using their resources very well
So the first part I explained to you was about operations
This tells you about the company's operations
But if I go below a company's operating profit margin
You get to see another header in the profit and loss statement
Which we call interest
And which we also call interest expense
So what is this?
Now consider that the company I was talking about whose sales were of Rs 100
Now consider that the company had taken some debt
That company had borrowed money from an institution
And they had borrowed a debt of Rs 1000
On that, the company, in every quarter
Consider that they have to pay a 10% interest rate
10% of Rs 1000 is Rs 100
So that Rs 100 is the company's interest expense
So higher the debt the company has taken the interest expense will be slightly higher
And lower the debt taken
Lower will be the interest expense
Now consider that a company has taken 0 debt
They have no interest expense to pay
Now I will come back to that case
The company's sale was Rs 100 and its operating profit was Rs 50
Now its interest is Rs 10
So this Rs 10 gets removed from its profit
So interest takes down a company's profit in its profit and loss statement
Higher the debt, higher the interest they have to pay
That much lower will the company's profit go
So whenever you research about any company, look carefully
Whether its debt isn't continuously increasing
If the debt increases, the company will be levered
Apart from this, the company's profit and loss statement
In that its profit will also be impacted
After incterest I will now talk about depreciation
Now you get to see depreciation in every profit and loss statement
The company whose physical assets are more
Now the question comes, what is depreciation?
So if I tell you about depreciation in technical terms
There is a non cash expense
Now what does this mean
Now consider that the company I was talking about, they have assets, they have machines
Using which, they made pens
Now consider that the company bought those machines at Rs 100
The company bought those machines at Rs 100 and the life of the machines was 10 years
Now there are different ways to remove depreciation here
I will talk in a very simple way
The machines that the company bought, its life was only ten years
Now the example the company bought the machines for Rs 100 and its life was 10 years
So consider that ever year its value will go down by Rs 10
Because of which after ten years, its value will become Rs 0
Now in this case, the value which goes down by Rs 10, is what we call depreciation
So, depreciation in simple terms
The assets of the company
By what percentage has that value been depreciated
And the percentage by which it depreciates
We write that in the profit and loss statement
And we minus that from the profit
But this is called non sash expenses because
For this the company does not have to pay cash
This is just a notional loss
Which the company recognizes in its profit and loss statement
Now consider that the case I was explaining this to you
There was a sale of Rs 100, Rs 50 was the expense and Rs 50 was left
And out of Rs 50, 10 was the interest loss
The profit left is Rs 40
Out of Rs 40, Rs 10 is its depreciation
Now what is left is Rs 30
After removing all this, the company's expenses left is Rs 30
But after this comes a very important thing
Which we call other income
Now what is other income
Now consider there is a pen making company, its main incomes comes from making pens
But consider that this consider
Sold some of their assets
Which they bought at Rs 100 but now they
Sold it at Rs 110
Their income was of Rs 10
The Rs 10 income will come in other income
Because that income doesn't come from the company's core income
So investors have to pay a lot of attention here
Many people look at the company's net profit and say that the company's profit is increasing every year
So this company is performing well
But whenever you invest in any company, you invest by looking at its core business not its profit
So if its net profit is increasing
You have to see the part the other income plays in its net profit
Because many times it is possible that the company is facing losses from its core business
But its profit is coming from other business which we call other income
So if its profit is not coming from its core business but from other income
It is a red flag on which you have to pay attention
You should look further and investigate
So I will go back to the case of pens
So if the company's other income was Rs 10, we will add it to the remaining profit of Rs 30
And the company's income comes out which we call profit before tax
Because the company has not paid taxes yet
So the PBT comes out to be Rs 40
Now the topic comes of tax
The tax the company has to pay
Now consider that the company pays a 25% tax
So from Rs 40, if I remove a 25% tax
They have to pay a tax of Rs 10
So after paying the tax, the Rs 30 left with the company
That is the company's net profit
So here, it is very important for every investor
You should see from the top to bottom
How the company has performed in every step
If you have chosen a company in which you are planning to invest
If you have to see its operational efficiency
Look at the operating profit margin
That should keep in increasing
After that you should see how its interest cost is
Whether the interest cost is increasing continuously
If it is increasing, where is the company using that debt
If the company is paying the debt back, its interest cost should be less
After that you should look at the depreciation
So depreciation becomes important for another theory
So as I told you there are many way to recognize depreciation
Now consider that the company knows that this time, its business is not going to do well
And its net profit is going to be less
So many times companies show their depreciation to be lesser
Because of which their net profit increases
So you should pay attention to all these things
And then you should see how the company's net profit turns out to be
So if you look at all these things carefully
It means that you have glanced through the profit and loss statement
We will talk about this in detail in the coming videos
Because apart from this, in every company's case
There can be different headers
Like in the case of banks, there is no cost of goods sold
There is cost of financing
Because the bank has to take money which they have to lend further
But if you go into this hierarchy and look further
You will get an idea, whether it is a bank or a financial institution
Or it is a manufacturing company
How its profit and loss statement works
So pay attention to the basic things
Investigate a little on every step
And if you see a red flag anywhere
Read its annual report
How you can read the annual report, we will cover in the coming videos of this series
So this was the first video of our series
If you liked this video, press the like button
You can comment down below and ask us any question regarding the profit and loss statement
So that we can clear your doubts
So this was the first video we brought out
In the coming time, we will be making very detailed videos
So that your educational purpose can be served
And you can find out how to do a fundamental research
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