Module 07: Reading Financial Statements

Modules 1 to 6 taught you how to record transactions and prepare statements. Module 7 turns the telescope round: given a published annual report, how do you read it? The running example throughout is Asian Paints Limited for the year ended 31 March 2020, the market leader in Indian paints. Three statements are covered, in order: the balance sheet, the statement of profit and loss, and the cash flow statement. Five full cases at the end turn each statement into an analytical method.

7.1 The balance sheet as a statement of wealth

The balance sheet lists all assets a company owns at a particular date, and all claims of owners and outsiders against those assets at that date.

The personal analogy the lecture uses is exact. When you apply for a bank loan you list land, building, gold, vehicles, fixed deposits, insurance policies, shares and bonds, then subtract outstanding loans. The difference is your wealth, and the bank uses it to decide your borrowing capacity.

What a reader can extract from the balance sheet alone:

Asset composition is a fingerprint of the business type:

7.2 Balance sheet format and Schedule III

Horizontal form puts assets on one side and liabilities plus equity on the other, mirroring the accounting equation. Vertical form, now standard, lists assets first and then liabilities and equity.

The sequence itself changed. Indian companies used to present equity first, then borrowings, then assets, which follows the logic of forming a business: raise equity, borrow, then invest. India switched to the international sequence for comparability. (The lecture's own discussion nonetheless follows the old order, equity, then liabilities, then assets, because it is easier to learn.)

For Indian companies, the Companies Act 2013 lays down the balance sheet format in Schedule III, with five major headings:

Each heading contains several line items, each of which is itself a consolidated figure. The schedules or notes give the breakup. A typical balance sheet has four columns: item description, note number, current-year value, previous-year value. Some companies add a fifth column for a third year.

7.3 Standalone versus consolidated statements

The entity concept says a business is a separate entity, and registering a company creates a legal entity. Statements prepared from the transactions of that one legal entity are standalone statements.

When a company owns more than 50% of the equity shares of another, the first is the holding company and the second is the subsidiary. Regulation then requires consolidated statements, which treat parent and subsidiaries as a single company and add all assets, liabilities, revenues and expenses.

Worked consolidation (100% ownership). ABC Limited owns 100% of XYZ Limited.

Two eliminations do the work. The Rs 200 investment disappears, because there is no point holding shares in yourself, and XYZ's equity of 200 is cancelled against it, so consolidated equity is 1,000 + 200 − 200 = 1,000.

Worked consolidation with minority interest. Now suppose ABC invested only Rs 160 and holds 80%. The other 20% belongs to minority shareholders (the modern term is non-controlling interest). ABC's current assets are then 440, since Rs 40 was not spent.

Answer: minority interest of Rs 40 is shown separately within equity.

Memory hook: Minority interest is a share of the subsidiary's net worth, not of the group's. Always compute it on (subsidiary assets − subsidiary liabilities), never on the parent's numbers.

In Asian Paints' consolidated balance sheet, total equity is Rs 10,553.69 crore, of which non-controlling interest is Rs 403.53 crore, about 4%. The subsidiaries are therefore almost wholly owned.

This is an oversimplified consolidation; a real one needs several further adjustments. What you must retain is that if the stake is below 100%, the minority interest is shown separately.

7.4 The balance sheet is prepared on a specific date

The heading reads "Balance Sheet as at 31 March 2020". The balance sheet as at 1 April 2020 would already be different. Most companies take almost six months to publish, so a statement dated 31 March 2024 may reach you on 10 August 2024, by which time the figures have moved. Many users therefore question the relevance of delayed statements, and listed companies are now required to publish quarterly financial statements to address it.

7.5 Funds employed: three sources of capital

Financial engineering adds hybrids. A convertible debenture is a debt instrument convertible into equity after a few years. Lease finance is another form of borrowed capital.

Sources are presented in order of permanence, most permanent at the top:

Equity → long-term debt → short-term debt → dues to suppliers

Note the last item: goods purchased on credit are a source of capital. The Reliance case in 7.16 shows suppliers' credit funding 17% of a four-year expansion.

7.6 Equity and preference share capital

At formation a group of promoters contributes the share capital; further capital can be raised later under the Companies Act procedures.

Limited liability is described in the lecture as one of the major legal innovations of the previous century, because it lets millions of small shareholders finance very large companies.

Reading the share capital note (Asian Paints):

Both figures are unchanged for two years, which tells you at a glance that no share capital transaction occurred. Although preference shares are authorised, none are outstanding; the company issued some years ago and repaid them.

7.7 Bonus shares

Bonus shares are issued free to existing shareholders. The accountant transfers value from retained earnings or general reserves to equity share capital.

Why do it, then? Liquidity. When a company does well the share price rises, and past a point there are few buyers. MRF trades around Rs 1,50,000 a share; almost nobody buys one share at that price, and holders find it hard to sell.

Worked illustration. You hold 100 shares at a market price of Rs 1,000, so your wealth is Rs 1,00,000.

Answer: wealth is identical in every case; only liquidity improves.

The Asian Paints bonus history. Asian Paints issued six bonus issues over three decades. An investor who bought 500 shares in 1984 for Rs 15,000 would hold 9,216 shares of Rs 10 today, and after the company split the Rs 10 share into Re 1, 92,160 shares of Re 1 each. At Rs 3,000 per share that holding is worth Rs 27.65 crore.

Answer: a compound return of 27.83% a year over 40 years.

7.8 Stock split, and bonus versus split

A stock split reduces the face value of the share. Split a Rs 10 share into Re 1 and a holder of 100 shares receives 1,000 shares of Re 1. Wealth is unchanged and the price is one tenth.

Common trap: A stock split requires no accounting entry at all. A bonus issue does, because value must move from reserves into share capital. This contrast is the likeliest exam point in the whole equity section.

Indian companies historically preferred bonus issues; the trend today is towards splits.

7.9 Cancellation of shares (buyback)

A company with surplus cash and no immediate growth opportunity can return cash either by raising the dividend or by repurchasing its own shares.

The entry is cash down and equity share capital down. If the price paid exceeds the face value, a third leg is needed: the excess is written off against retained earnings or the securities premium account.

Worked example. Face value Rs 10; the company buys back at Rs 200.

Answer: share capital falls only by face value; the entire premium of Rs 190 is absorbed by reserves.

7.10 Other equity

Under the heading Equity sit two items: equity share capital and other equity. Other equity was formerly called Reserves and Surplus; the name changed to accommodate a few additional items.

Reserves are amounts set aside out of profit, mainly to fund expansion. How much is retained versus paid out as dividend depends on the growth opportunity.

Common trap: Non-accountants assume reserves are held as cash. They are not. Suppose a company earns Rs 1,000, all realised in cash, pays Rs 200 as dividend and retains Rs 800. It spends Rs 700 on new machines, Rs 50 on extra raw material, Rs 20 repaying a loan, and keeps Rs 30 in cash. Asked what form the reserve is in, the answer is: Rs 700 as machines, Rs 50 as raw material, Rs 20 gone into loan repayment, Rs 30 as cash. The purpose of retaining was never to sit on the money.

Capital reserve. Some reserves come out of capital transactions, not profit. Suppose you acquire a company whose assets are worth Rs 100 crore and you bargain the price down to Rs 70 crore.

Why the classification matters. Suppose a company holds a capital reserve of 300 and a general reserve of 100, has paid a dividend for 20 years and now incurs a loss but still wants to pay.

Memory hook: A general reserve can fund a dividend in a loss year. A capital reserve cannot. In the example the company can pay up to 100, not 400 and certainly not 200.

Asian Paints' other equity, major items:

The split between general reserve and retained earnings is purely technical: together they are the cumulative profit of many years after dividends.

7.11 Other comprehensive income (OCI)

Drop the word "comprehensive" and OCI becomes readable: it is unrealised profit.

Suppose Asian Paints puts surplus cash into Rs 100 crore of State Bank of India stock, which is worth Rs 140 crore at the year end and is still held. There is an unrealised profit of Rs 40 crore. Indian companies used to ignore it and disclose market value in a footnote; after IFRS adoption the unrealised profit must be recognised, in one of two places:

Formula: The general rule is that unrealised profit on debt instruments goes to other equity, while unrealised profit on equity instruments may go either way.

The three entries, end to end. Bought for 100 crore, worth 140 crore on 31 March, sold for 150 crore in May.

If the company instead routes the unrealised gain through profit and loss, only the middle entry changes: SBI investment +40, FVTPL +40.

A relief for the analyst. None of these classifications is used in performance analysis. For Module 8 we simply add equity share capital and other equity and call the sum shareholders' equity, or just equity.

7.12 Non-current liabilities

Non-current means settled after more than one year.

Deferred tax, worked in full. A company buys a machine for Rs 500 lakh. It uses 10% straight line for the financial statements and 20% written down value for tax. PBDIT is Rs 200 lakh every year, the tax rate is 30% and there is no salvage value.

The year 1 entry:

The year 5 entry, where the deferral starts reversing:

Answer: Rs 15 lakh is deferred in year 1 and Rs 9 lakh in year 2; from year 5 the company begins paying back what it deferred.

Memory hook: There is no revenue loss to the government, only a time-value-of-money loss. Tax authorities charge no interest on deferred tax, so it behaves like an interest-free loan from the government. The government allows it because you can only defer by buying a new machine, which creates growth, employment and GST.

As of March 2020, Asian Paints' deferred tax stands at Rs 282.68 crore, lower than the previous year, which means the company has started repaying earlier deferrals.

The mirror image also exists. Tax authorities disallow provisions charged as expense, so tax is paid in advance rather than deferred, creating a deferred tax asset (like a prepaid tax). The balance sheet figure is the net of deferred tax liability and deferred tax asset.

7.13 Current liabilities and the capital split

Current liabilities are discharged within one year. Many headings repeat from non-current liabilities, split by timing: lease rent payable within a year sits here, payable after a year sits above.

The only genuinely new item is trade payables, amounts owed to suppliers of goods and services. Companies must disclose amounts due to micro enterprises separately.

Asian Paints' total capital of Rs 13,587.68 crore breaks down as:

Answer: Asian Paints is overwhelmingly equity funded, with long-term debt supplying only about 7% of capital. That is consistent with the very small interest cost seen in 7.16.

7.14 Non-current assets and the PPE schedule

Non-current assets are held long term and do not change form; current assets change form as they are consumed.

Common trap: Capital work in progress must be excluded when analysing performance. It has not yet produced a rupee of revenue, so leaving it in the asset base unfairly depresses every return ratio.

The PPE schedule structure, which is the format you are expected to be able to read:

Rows separate tangible assets (land, building, plant and equipment, scientific research equipment, furniture and fixtures, vehicles, office equipment, computer hardware) from intangibles (trademarks, computer software, goodwill, brand). Two years are shown side by side. Only the sum of the net blocks appears in the main balance sheet.

For Asian Paints, gross tangible assets are Rs 5,733.93 crore and accumulated depreciation Rs 1,585.33 crore, giving the net tangible block of Rs 4,148.60 crore. That net figure is lower than last year, which tells you the depreciation charge exceeded new purchases. The net intangible block of Rs 85.63 crore is higher than last year, because about Rs 100 crore went into new software.

Total non-current assets are Rs 7,761.92 crore.

7.15 Current assets and the operating cycle

The capital required to run day-to-day operations is working capital, and it is used to create current assets. An asset likely to change its form within a year is a current asset.

The operating cycle (also called the working capital cycle):

Cash → raw material → work in progress → finished goods → receivables → cash

A live analytical read. Asian Paints' receivables note classifies debts as good or doubtful. Doubtful debts were about 2% of receivables last year and about 3% this year. A rising percentage is a matter of concern and will normally trigger a tightening of the credit appraisal process.

7.16 The statement of profit and loss: income

The income statement is prepared for a period, with a start date and an end date. Two broad headings, income and expenses, and the difference is profit.

Total income has four line items, the first three grouped as Revenue from Operations:

Other income includes interest income, dividend income, royalty, insurance claims, foreign exchange gains and net gain on sale of assets.

Forex gain worked. A company invoices a customer USD 100,000 on 90-day credit when USD 1 = Rs 80.

Answer: a forex gain of Rs 2 lakh, reported within other income.

Common trap: Other income deserves less weight in performance assessment. It varies wildly year to year and is not earned through core operations. Indexed to 2010, Asian Paints' sales and net profit both rose nearly fourfold while other income rose only about twofold, and with visible volatility. Sales can be forecast with a model; other income cannot.

Revenue for the year rose by Rs 875 crore, a growth of 5%.

7.17 Expenses: the five heads

Why "changes in inventories" exists, proved. Stores issue Rs 100 of raw material. The production shop spends another Rs 200 and transfers Rs 300 of goods to sales. Opening finished goods were Rs 60; goods costing Rs 280 were sold for Rs 350.

Answer: both routes give Rs 70. The Rs 20 increase in finished goods stock is the bridge.

Formula: If closing stock exceeds opening stock, add the change. If closing is lower, deduct it.

Other expenses, regrouped by function (this regrouping is the analyst's job, the statement does not do it):

Two rules worth memorising:

• Bad debts and allowances for doubtful debts are treated as marketing expenses, because the marketing department makes the credit decision.
• Indian companies must spend 2% of average profits on CSR (corporate social responsibility): community development, education, health care and similar activities.

Memory hook: US and other developed-market income statements give only two expense heads, cost of sales and SGA. Indian statements give a much richer expense list. To compare an Indian company with a foreign one you must recast the Indian statement into cost of sales and SGA.

7.18 The profit ladder and margins

PBDIT and EBITDA are the same thing: Earnings Before Interest, Taxes, Depreciation and Amortisation. Note that revenue grew 5% while PBDIT grew 11%, which is economies of scale plus cost control. Interest is small because the company barely borrows.

Margins:

A PAT margin of 15.31% means Rs 15.31 of profit for every Rs 100 of revenue after everything.

Common trap: The 26% jump in PAT is mostly a lower tax expense, not better operations. Tax deferral and tax savings have nothing to do with operational efficiency, which is why analysis in this course leans on PBIT rather than PAT. Exceptional items (a fire loss, say) are shown separately and are likewise ignored, being one-time.

Tax expense splits into current tax (payable per the tax computation) and deferred tax. A company in growth phase investing heavily in assets can defer.

7.19 The cash flow statement

The cash flow statement summarises all cash transactions of a period and explains how the opening cash balance became the closing balance.

The previous year the company added Rs 473.29 crore of cash; this year it withdrew Rs 462.43 crore, because cash used in investing and financing exceeded cash generated by operations.

Common trap (transcript erratum): The lecture quotes cash from operating activities as Rs 2,047.47 crore in one deck and Rs 2,813.07 crore in another. Neither reconciles with the other, and the bridge above only ties if operating cash flow is Rs 2,407.47 crore (2,407.47 − 774.65 − 2,095.25 = −462.43). Learn the structure of the bridge, and do not memorise a CFO figure for Asian Paints from these decks.

Cash flow from investing. Asian Paints spent Rs 306.43 crore on property, plant and equipment during the year, against Rs 1,067.26 crore the previous year. The remaining lines are financial investments and the income earned on them.

Cash flow from financing. Inflows are borrowing and fresh equity; outflows are loan repayment, share repurchase, lease rent (a lease is a source of finance), interest and dividend. Dividend is the major outflow in Asian Paints' statement.

7.20 Direct and indirect method

The receivables adjustment worked. Opening receivables 100, credit sales during the year 500, closing receivables 60.

The P&L already recognises 500 as revenue, but 540 came in. Add the decrease in receivables of 40 and you reach 540.

Memory hook: Preparing a full indirect statement is explicitly beyond the scope of this course. Accounting software produces both. What you need is the intuition: a decrease in a current asset is added back, because cash came in that the P&L had already recognised earlier.

7.21 The ideal cash flow signature

Formula: Operating positive, investing negative, financing positive.

7.22 Adjusted accrual profit: the window-dressing test

Users can compare an adjusted profit figure against operating cash flow to check for earnings management.

Two adjustments and their reasons:

• Remove dividend, interest and other investment income, because those cash flows belong to investing activities, not operating.
• Deduct current tax only, not deferred tax, because deferred tax has not been paid.

How to read the gap:

For Asian Paints FY2020, the lecture reports AAP of Rs 3,191.77 crore against CFO of Rs 2,813.07 crore, a gap of Rs 378.70 crore, against Rs 392 crore the previous year. Relative to the scale of operations the gap is normal.

Memory hook: The lecture's own instruction is blunt. "If the gap between the two is large, then we should not proceed with our analysis of the financial statements." Reliability of profit is a gate before ratio analysis, not an afterthought.

7.23 Case 1: Funding analysis (Reliance Industries, 2011 versus 2015)

Question: between March 2011 and March 2015 Reliance's assets grew from Rs 2,84,719 crore to Rs 3,97,785 crore, an addition of Rs 1,13,066 crore. Where did the money come from?

Method: take the difference in every balance sheet line across the two dates, express each source as a percentage of the total requirement, and rank them.

Answer: the top three sources supply about 96% of the requirement, in the order internal accruals, long-term borrowing, suppliers' credit.

Two of these deserve comment. Deferred tax is a source of capital: the government has agreed to collect later. Long-term provisions (gratuity and similar employee benefits) are also a source, because the company holds the money until employees leave.

Memory hook: This ordering is exactly what pecking order theory predicts: firms prefer internal accruals first, then long-term borrowing, then supplier credit.

The risk note. Funding long-term investment with suppliers' credit is short-term capital financing long-term assets, which is risky: if suppliers demand payment before the investment yields returns, the firm is squeezed. A modest amount is nonetheless a cheap and useful source.

Where did it go?

More than two thirds went long-term, chiefly into capital work in progress (new facilities not yet earning) and investments in subsidiaries, which is Reliance's habitual pattern of incubating a subsidiary and merging it back once mature. On the current side the largest item was current investments, funds temporarily parked, plus about Rs 7,000 crore of inventories, while receivables actually fell, meaning faster collection.

Common trap: This analysis is meaningless year on year, where changes are small. Run it over five or ten years to see the structural shift.

7.24 Case 2: Funding the losses (Tata Motors, FY2014 versus FY2015)

The principle. A loss must be funded from one of three places: fresh equity, fresh loans, or a reduction in assets.

Shareholders' funds fell from Rs 19,177 crore to Rs 14,863 crore, and within that reserves and surplus fell from Rs 18,510 crore to Rs 14,196 crore. Since reserves move by profit less dividend, the fall is the loss.

Answer: Rs 6,148 crore was raised, of which Rs 4,314 crore funded the loss and Rs 1,834 crore went into additional current assets.

Common trap (transcript erratum): The lecture states the loss as "around 4,739 crore". That figure does not reconcile: the balance sheet difference is 4,314, and only 4,314 makes the sources equal the uses (6,148 − 1,834 = 4,314). Use 4,314.

Note that the increase in short-term borrowing was actually about Rs 3,000 crore, but a fall in trade payables absorbed much of it, so the net contribution of current liabilities is only Rs 1,573 crore. Always work with the net movement of a heading, not one line inside it.

7.25 Case 3: Comparing the financials (Tata Steel versus SAIL)

The method is common size analysis on the balance sheet: express every line as a percentage of total assets, for two companies across two years.

The headline. Both companies earn similar revenue (Tata Steel about Rs 45,000 crore, SAIL about Rs 41,000 crore) but Tata Steel's total assets are about Rs 67,677 crore against SAIL's Rs 99,000 crore.

Answer: Tata Steel generates comparable revenue on about two-thirds of the assets, so it manages assets far more efficiently. That single observation is the case.

Funding side, as a percentage of total assets:

The reading is clean. Tata Steel strengthened internal capital and reduced reliance on current liabilities. SAIL did the opposite, letting the shareholders' contribution fall and current liabilities rise, and leaning on short-term borrowing for about 14% of its capital where Tata Steel uses almost none. Tata Steel also attracts roughly double SAIL's trade payables, which is cheap funding.

Asset side, as a percentage of total assets:

Answer: Tata Steel runs on more fixed assets and far fewer current assets. The lecture's judgment: investment in current assets is idle resource, investment in fixed assets is productive, so a lower current-asset percentage at the same revenue is a good thing.

The CWIP contrast is the forward-looking part: Tata Steel's rising CWIP means it is still expanding, while SAIL's falling CWIP means projects are being completed.

7.26 Case 4: Assessing the performance (CEAT versus Apollo Tyres)

The method is common size analysis on the income statement: set revenue = 100 and express every expense as a percentage, over three years (FY2013 to FY2015).

The puzzle. CEAT's revenue grew about 15% (Rs 4,902 crore to Rs 5,620 crore) while its profit grew about three times (Rs 106 crore to Rs 298 crore). Apollo's revenue grew about 4.7% (about Rs 8,500 crore to Rs 8,900 crore) while its profit doubled (Rs 312 crore to Rs 645 crore). How can profit move so much more than revenue?

Common size income statement, revenue = 100:

The answer, in two moves.

1. Raw material cost fell about 9 to 10 points at both companies. But the saving is partly given back: other expenses rose 4 points and employee cost 1 point at each. The net gain is only 3 margin points at each company.
2. Three points on a growing revenue base is a very large absolute number.

Answer: reported profits of 106 → 298 (CEAT) and 312 → 645 (Apollo) are almost exactly reproduced by margin times revenue. CEAT's effect is larger because its revenue grew Rs 700 crore against Apollo's Rs 400 crore, on the same 3-point margin gain.

Memory hook: Profit growth = margin improvement multiplied by revenue growth. Neither alone explains a tripling. Apollo controls other expenses better throughout (12 to 16 points against CEAT's 17 to 21), which is why it starts and ends with the higher margin.

7.27 Case 5: Reliability of earnings (REI Agro)

The setting. REI Agro was one of India's largest basmati rice traders. The company is about to raise money through a non-convertible debenture. Should you lend?

What the income statement says (FY2006 to FY2010):

Revenue growing fast, profits growing steadily, everything positive. On the income statement alone, you lend.

What the balance sheet says:

What the cash flow statement says: cash flow from operating activities is negative in every year, and the negative figures grow. Rising profit with persistently negative CFO is the alarm.

The diagnostic ratio.

Receivables behave normally. Inventory does not. Holding 95% of a year's sales as stock is not a business, it is a valuation.

The mechanism, demonstrated with the smallest possible numbers. Sales 100, purchases 120, true consumption 110.

Answer: inflating closing inventory from 10 to 40 turns a loss of 10 into a profit of 20, while operating cash flow is −20 in both cases. The P&L can be moved; the cash flow cannot.

What actually happened. Inventory as a percentage of sales stayed at 96%, 88% and 92% through FY2011 to FY2013 while the company kept reporting profits. In FY2014 it fell to 73% and the company reported a loss. In the following year it collapsed to 14%, inventory fell from Rs 3,283 crore to Rs 261 crore, and the company reported a loss of Rs 5,494 crore.

Basmati rice costing Rs 3,021 crore cannot realistically be sold for Rs 1,855 crore. The likelier reading is that roughly Rs 2,000 crore of the "inventory" never existed. The share price traced the same arc: 13, 53, 45, 31, 27, then 16, 10, 6.6, 1.2, 0.75, 0.5, and by March 2017 the company had ceased to exist.

The motive. The company had grown revenue on very heavy borrowing. Reporting a loss would have stopped further lending and triggered demands for interest and principal, so the profit had to keep appearing.

Memory hook: A scam of this shape cannot run forever, because sooner or later somebody counts the godown. The correction, when it comes, arrives all at once as a catastrophic loss.

The lesson for the lender. Compute adjusted accrual profit and compare it with cash flow from operating activities. Where the two are consistent, the income statement can be trusted and the decision made on it. Where they diverge persistently, do not proceed.

7.28 Summary

• The balance sheet shows how capital was raised and where it was used. It is a statement of wealth as at a date, in the Schedule III format of the Companies Act 2013, under five headings.
• Consolidated statements add the subsidiaries; the parent's investment and the subsidiary's equity are eliminated, and minority (non-controlling) interest = (subsidiary assets − subsidiary liabilities) × minority %.
• Capital comes from equity, retained profit and borrowing, arranged in order of permanence, with supplier credit at the bottom.
• Bonus shares move value from reserves to share capital and need an entry; a stock split cuts face value and needs no entry. Neither changes shareholder wealth.
• Buyback reduces share capital by face value only, with the premium written off against reserves.
• Other equity holds capital reserve, general reserve, retained earnings and OCI (unrealised profit). General reserve can fund a dividend in a loss year; capital reserve cannot. Reserves are not cash.
• Deferred tax arises from SLM in the books against WDV for tax. It is an interest-free government loan that reverses in later years.
• Capital work in progress is excluded from performance analysis. The PPE schedule runs gross carrying value, accumulated depreciation and net block, each with opening, additions, deductions and closing.
• The profit ladder is PBDIT (= EBITDA) → PBIT → PBT → PAT. Give less weight to PAT (tax effects) and to other income and exceptional items.
• Cash flow has three heads; the ideal signature is operating positive, investing negative, financing positive. Adjusted accrual profit compared to CFO is the reliability gate before any ratio analysis.
• The five cases give five methods: funding analysis (difference every line, rank as a percentage of the requirement), funding losses (equity, loans or asset sales), common size balance sheet (percentage of total assets), common size income statement (revenue = 100), and reliability of earnings (profit against cash flow, with the inventory ratio as the tell).