The Study of Stock Market through Fundamental Analysis

Lesson -> The Balance Sheet part 2

7.1 - Balance Sheet Assets

We have already covered the liability side in great detail in the previous chapter. Now we will look at the 2 and halves of the balance sheet. The Asset side of the balance sheets. The Asset side of the balance sheet shows all assets, in different forms, since its inception. In simple terms, assets are resources that a company holds which aid in generating revenues. This is the Assets side in the balance sheet.

You can see that the Asset side is divided into two sections: Current assets and Non-current assets. The Asset side has two main sections: Current assets and Non-current assets. Each section has several line items, along with associated notes. Each of these line items will be examined.

7.2 - The Non current assets (Fixed assets)

Like the previous chapter, noncurrent assets refer to assets that the company has no economic benefit for a longer period of time (beyond 365 calendar days). An asset that a company owns is expected to provide the company with an economic benefit throughout its useful life.

You will notice a section called "Fixed assets" under the non-current assets. It has many line items. Fixed assets are both tangible and intangible assets that a company has but cannot convert to cash or liquidate quickly. Examples of fixed assets include land, machinery, vehicles, buildings, and other tangible assets. Because they provide long-term benefits to companies, intangible assets can also be considered fixed assets. As you can see, all line items in fixed assets share a common note, number 10, which we will examine in greater detail very soon.

Here's a snapshot of Amara Raja Batteries Limited's fixed assets:

The value of the first line item, 'Tangible Assets', is Rs.619.8Crs. Assets that have a physical form are called tangible assets. These assets are visible and can be touched. This includes vehicles, plant, machinery, fixtures, and buildings.

The next line item also reports the value for Intangible assets worth Rs.3.2 crores. Intangible assets are assets that have economic value but have no physical nature. This includes, but is not limited to, patents, copyrights and trademarks as well as designs.

Remember that depreciation was discussed when we were discussing the P&L statement. Depreciation is the process of spreading out the cost of purchasing the asset over its useful lifetime. As assets age and lose production capacity, the asset's value decreases. This is the Depreciation expense. It's shown in the Profit & Loss Account and on the Balance Sheet.

All assets should be depreciated throughout their useful lives. This is why the Gross Block is the name given to assets that are acquired by a company. After subtracting depreciation from the Gross block, we can reach the 'Net Block.

Net Block = Gross Block-Accumulated Decreciation

Notice that the term "Accumulated" is used to refer to all depreciation values since incorporation.

Remember that tangible assets are Rs.619.8 crores and intangible assets are Rs.3.2 crores. The company reports its Net block which is net of accrued depreciation. Take a look at Note 10, which deals with fixed assets.

At the top of the note, you can see the Gross Block, Depreciation/amortization, and a Net block is highlighted. The netblock numbers highlighted correspond to the information in the balance sheet.
The Total Depreciation for this year is:

Let's take a look at some other interesting aspects of this note. You can find the complete list of assets owned by the company under the tab Tangible assets.

The company, for example, has listed "Buildings" as one of its tangible assets. This is what I highlighted:

ARBL reported that the building's current value was Rs.93.4 Crs as of 31 March 2013. The company also added Rs.85.8Crs to the building during FY14. This amount is called 'additions throughout the year'. They also acquired a building worth Rs.85.8Crs; this amount is called 'deductions throughout the year'. The current value of the building in the current year would therefore be:

Value of the building in the previous year + any additions made during the year.

93.4 + 85.8 = 0.668

= 178.5Crs

This number is highlighted in blue on the above image. This is the gross block. To get to the 'Net Block, one must subtract the accumulated depreciation. Below is a snapshot of the depreciation section for the Building.

ARBL depreciated Rs.17.2 Cros on 31 March 2013. (FY13). They need to add Rs.2.8 crores from FY14 and adjust 0.376 crs as the year's deduction. This is Year's total depreciation.

Past year's Depreciation Value + Current Year's Depreciation - A deduction for the year

= 17.2 + 2.99 - 0.376

Total Depreciation= Rs.19.736 Crs. This is highlighted in red on the above image.

 A gross block of Rs.178.6 Cros must be built with R.19.73 Crs depreciation. 

To arrive at the Total net block number, the same process is repeated for all tangible and intangible assets.

Next are Intangible assets in development and Capital work currently in progress (CWIP).

CWIP covers machinery under assembly, building under construction and machinery under construction. At the time of preparing balance sheet. It is known by other name "Capital Work in Progress". This amount is often mentioned in the Net block section. CWIP refers to work that has not been completed but in which capital expenditures have already been incurred. ARBL's CWIP budget is Rs.144.3 Crores. After the asset has been used and is completed with construction, it is transferred to tangible assets (under fixed asset) under CWIP.

Last line item: "Intangible assets under Construction". This is the same as CWIP, but for intangible assets. This could include patent filing, copyright submission, brand development, and so on. ARBL charges 0.3 Crores for this work. These costs are added together to calculate the company's total fixed cost.

7.3 - Other line items (Non-current assets)

There are also other line items, in addition to the non-current assets fixed assets. Here's a quick snapshot of the same.

ARBL makes non-current investments with a long-term perspective. This amount is Rs.16.07 crores. This could be used to buy listed equity shares or minority stakes in other companies. This is Note 11. This should give an overview of the situation.

Next, long term loans and advances are at Rs.56.7Crs. These loans and advances are given by the company to employees, suppliers, vendors, group companies, etc.

The last line item in the Non-current assets section is 'Other non-current assets'. It is located at Rs. 0.122 Crs. Other miscellaneous long-term assets are also included.

7.4 - Current assets

Current assets are assets that can easily be converted into cash and the company anticipates that these assets will be consumed within 365 days. Current assets are assets used by a company to finance its day-to-day operations and ongoing expenses.

Current assets include cash and cash equivalents as well as inventories, receivables, inventories and short-term loans and advances, and other debtors.

Here's a snapshot of ARBL's current assets:

Inventory is the first line item in the Current assets. It stands at Rs.335.0 Crores. Inventory is the total of all finished goods produced by the company. It also includes raw materials in stock and goods that have been incompletely manufactured. Inventory is goods that are still in various stages of production but have not yet been sold. Each product manufactured by a company goes through several raw material processing to become a finished product. Below is a Snapshot of Note 14. This note refers to the inventory of the company.

As you can see, the bulk of inventory value comes from Raw material' or 'Work-in progress'.

Next is 'Trade Receivables, also known as 'Accounts Receivables. This is the money the company expects to receive from customers, distributors and other related parties. ARBL's trade receivable stands at Rs.452.7 Crore.

Next is Cash and Cash equivalents. These assets are the most liquid assets in any company's balance sheet. Cash is a combination of cash on hand as well as cash on demand. Cash equivalents are liquid, short-term investments that have a maturity of less than three months after the date of acquisition. This is Rs.294.5 Crs. Below is Note 16. This note pertains to cash and bank balances. As you can see the company has cash in different types of accounts.

Next, the company will repay the short-term loans or advances within 365 days. This includes advances to suppliers, loans customers, loans employees, and advance tax payments (income, wealth, etc.). It is currently Rs. 211.9 Crs. This is the last line item in the Assets side, and the Balance sheet. This is the 'Other assets' that aren't considered to be important and hence called 'Other. This amount is Rs.4.3 Crores.

Summarising, the Total Assets for the company would now be:

Fixed Assets + Current Assets

= Rs.840.831 Crs + R.1298.61 Cros

= Rs. = Rs.

We have now completed the Balance sheet's Assets side and the entire Balance sheet. Let's take a look at the entire balance sheet.

The balance sheet equation for ARBL's balance sheets is as you can see from the above.

Asset = Shareholders Funds + Liabilities

Remember that we have only looked at the balance sheet and P&L statements in the last few chapters. We haven't analyzed the data to determine if the numbers were good or not. The financial ratio analysis chapter will be the same.

Next, we will be looking at the Cash flow statement, the last financial statement. Before we close this chapter, let's examine the interconnectedness of the Balance sheet and the P&L statements.

7.5 - Connecting P&L and Balance Sheet

Let's now look at the Balance Sheet, the P&L Statement, and all the ways they affect each other.

Take a look at this image:

The image shows the line items of a typical P&L statement. We also have some standard items from the Balance Sheet. You already know the meaning of each line item from previous chapters. We will be able to see how the P&L line items and Balance Sheet line items are linked.

Consider the following: Revenue from Sales. A company incurs costs when it makes a sale. If the company decides to run an advertising campaign to promote its products, it will incur expenses. Spend cash Follow the campaign. The cash balance will decrease as a result of the money spent. The company may make a sale using credit.ReceivablesAccounts Receivables go up.

Operating expensesInclude the purchase of raw materials, finished goods, and similar expenses. Two things can happen when a company has to incur these expenses in order to make goods. If the purchase was made on credit, which it almost always is, the trade payablesThe (accounts payable), go higher. Two, the Inventory The level can also be affected. The company's ability to sell its products in a short time will determine whether the inventory value is high, or low.

Companies purchase tangible assets (Intangible assets) and invest in Brand building activities (Tangible assets). This spreads the asset’s purchase value over its economic useful life. This can increase the asset's value.depreciationThe Balance sheet will include these details. Remember that the Balance sheet is prepared using a flow-based method. The Depreciation is calculated year after year. Please note that the Depreciation in the Balance sheet is also called theAccumulated Depreciation

Other income This includes income from interest income, the sale of subsidiaries companies, rental income, etc. Companies that engage in activities such as renting out their properties, or selling subsidiary companies, will be subject to this tax.InvestActivities, as well as other incomes, are often affected.

If the company engages in debt the company spends money to finance the debt, whether it is short-term or long-term. The amount of money used to finance the debt is known as the finance Cost/Borrowing Price. Therefore, as debt rises, so does the finance cost.

As you may be aware, the profit after tax (PAT) This adds to the company’s surplus. Equity for shareholders.

To Summarize

  1. The Balance sheet's Assets section displays all assets owned by the company.
  2. Assets can be expected to provide an economic benefit throughout their useful lives.
  3. Assets can be classified as either Non-current or Current assets.
  4. Non-current assets are expected to have a useful life beyond 365 days, or 12 months.
  5. Current assets should be paid off in 365 days or 12 months.
  6. The 'Gross Bloc' is an asset that includes depreciation.
  7. The Net Block = The Gross Block -  The Accumulated depreciation
  8. The sum of all assets must equal the sum of all liabilities. The Balance sheet can only be balanced when all assets are equal to all liabilities.
  9. P&L and the Balance sheet are interdependent. They are interconnected in many ways.