Mar 27, 2009|
Gauging a company's revenues
In the previous article, we had taken a brief look at the key financial statements that are found in a company's annual report.
In today's article, we will take a look how one should view and analyse the key revenue constituents of a profit and loss account (P&L).
Core vs non-core
A handful of companies report the 'total income' earned by them within a year as 'sales'. We believe one should always take into consideration a company's integral earnings (core operations) as sales and not the income that is generated from other operations. The latter could include items such income from sale of scrap, income from interest and dividends, forex gains, profit on sale of assets, export incentives, job charges, and miscellaneous receipts, amongst others.
While these items may not be a significant part of the total income, we believe it is a good practice to follow, apart from knowing the precise figures. In fact, it would be even better if one could further bifurcate such earnings under two heads - other operating income and other income. Details regarding total income are found in respective schedules.
Segment and region wise
Revenues are generated from sales of goods or services. However, for companies which have presence in various businesses, a good practice would be to study the change in segment wise/ product wise / businesswise revenues on a year on year basis. One can also take a look how the income from each business segment (as a percentage of net sales) has changed over the years. This gives a good judgment in knowing how a company's segments or businesses have been performing over a particular time frame.
Companies enter new businesses for two main reasons -to diversify their revenue streams and de-risk their business from a presence in a single segment. Further it also helps to capitalise on the opportunities in fast growing segments. A classic example would be ITC Limited's entrance into other business (hotels, agri, non-FMCG, papers, etc.) Over time, this move has helped it reduce dependence on its cigarettes business. The adjacent chart shows gives an idea as to how the scenario has changed for the company over the past few years.
Another way a company can diversify itself is by having presence across geographies. An investor can study a company's revenue pattern (from each zone, region or country) over the years. Companies having transnational presence have the option of focusing on the high growth areas or areas that are relatively resilient to an economic slowdown. In addition, if its operations in a certain country/region are witnessing a problem, it could curb the fall in revenue by focusing on operations in other countries/regions.
Seasonal and cyclical businesses
The revenue volatility would remain high for companies that are present in seasonal or cyclical businesses, especially if viewed on a quarterly basis. A seasonal business is a business for which certain seasons of the year are far more profitable than others. These include businesses such as seeds and fertilizers (harvest season), hotels (vacation), air conditioners (summer season), rain coats and umbrellas (monsoon season), amongst others. On the other hand, a cyclical business is largely dependent on economic cycles. A classic example for the same would be the cement business, wherein there is a high correlation between the GDP growth and the growth in cement consumption.
As such, we would recommend investors to look at performance of such companies over the long run.
In the next article, we shall take a look at the key expenditure constituents of a P&L. It would be advisable for investors to not look at the P&L revenue constituents on a standalone basis but to review the same in relation with the expenditure constituents to gauge the overall impact.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
Aug 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407