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Analysis of Operating Statements
Statutory Framework
Every company must hold an Annual General Meeting (AGM) within 15 months of the previous one. The Board of Directors is legally required to present:
- Balance Sheet (Snapshot of position)
- Profit & Loss Account (Flow of performance)
Ref: Companies Act 2013, Schedule III requirements.
The Tripartite Structure of P&L
1. Manufacturing
Direct cost of production: Raw materials, wages, and power. Establishes the Cost of Goods Manufactured.
2. Trading
Sales vs. Manufacturing Cost. Determines the Gross Profit margin before overheads.
3. Appropriation
The "Connecting Link". How profit is distributed: Taxes, Dividends, and Retained Earnings.
Standard Analytical Grouping
For effective credit analysis, we re-classify Profit & Loss items into these distinct groups:
- Total Sales & Other Income
- Cost of Goods Sold (COGS)
- Gross Profit Margin
- Selling & Distribution Expenses
- Administrative Overheads
- Net Operating Profit/Loss
Vertical & Trend Analysis
Comparing expenses as a percentage of sales helps identify structural inefficiencies.
| Details | Year 1 | % | Year 2 | % |
|---|---|---|---|---|
| Sales | 4,55,000 | 100 | 4,10,000 | 100 |
| COGS | 3,73,100 | 82 | 3,52,600 | 86 |
| Gross Profit | 81,900 | 18 | 57,400 | 14 |
Core Efficiency Metrics
Cost Structure
Manufacturing Ratio, Operating Ratio.
Management efficiency
Capital Turnover, Asset Utilization.
Operational Income: The Credit Engine
Bank advances are expected to be repaid from the profits generated by core activity.
Practical Case Studies
The Scenario: Indicators looked excellent, but recasting revealed a core operational loss.
View Financial Breakdown
| Operating Details | 2017 (Lacs) |
|---|---|
| Net Sales | 7,400 |
| Total COGS | 6,130 |
| Gross Profit | 1,270 |
| Overheads & Interest | 1,475 |
| OPERATING LOSS | (-) 205 |
| Non-Op Income | + 490 |
| NET PROFIT (Total) | 220 |
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