Ways of analysing Balance sheets


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In the file attached(Dabur.xls),a somewhat unique way(though nothing new) of analyzing Balance sheet is presented. Normally one sees common size statements (percentage of total sales) and trend percentages( first year assumed to be base year and 100) in the profit and loss account.
This is the first time I have come across it in Balance sheets like this. On the top, everything on the right is presented as a percentage of total assets which makes relative comparison easier. The first five columns represent the actual, absolute figures and the next five columns represent the same data as percentages of total assets. Therefore their totals are 100.

In the second presentation below, the first year is the base year and the rest are a percentage of the first year. This is not a strong relative comparison and needs further scrutiny.After the first five columns containing real absolute figuers, the first column of next five is missing as that is the base year and the rest are percentages of base year.

Investors are more obsessed with earnings than valuations and therefore profit and loss account generally has more importance. We used to peep in the balance sheet only to see the capital to free reserves or debt_equity ratio.This is quite a revelation.

Vision books has a new book Balance sheets- Analysis and Interpretation by Hemant R. Dani. It is good for both newbies and oldies from where I picked up the above analysis. It explains everything from scratch-How a balance sheet is made to how it is analyzed.
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Good stuff. Wd however be more useful if projections can be analysed. The past is not always a good indicator of the future. And lets face it: the market always moves in anticipation, often ignoring the past !

Turnarounds do take place. Likewise, strong cos sometimes get into quicksand and start sinking. Look at Arvind Mills ... they are experts in this paradigm.

But its trues... common size statements are a powerful and efficient tool for analysis


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I agree. I know that price earnings ratio is also in relation to projected future earnings per share but for a layman not knowing the intricacies of the industries, projecting future values is not easy. It cannot be done as a mecahanical exercise by blindly looking at the figures from the past.

Discounted cash flows of future earnings is beyond the purview of laymen. Even today nobody knows how Warren buffet calucaltes intrinsic value.

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