How to analyse quarterly results statement

Decoding the Quarterly Results Statement

Going ahead in the article, we have provided important parameters to be analysed from the income statement of quarterly results.

Net Sales

First and the foremost parameter is sales growth. For analysis purpose, we consider net sales figures and not the gross sales.We have to decode the sales growth further, as it comprises of volume growth and price (realization) growth. If growth in the net sales is volume based, it is considered better as compared to price growth. The simple factor-price-rise eventually affects the volume growth as consumers are price sensitive. Further, an increase in volumes also makes sure that the capacity utilisations are higher, resulting in better operating leverage. Here, there are fewmore aspects to it, like for realty companies it is not the results that matters.However, we have to analyse how the realization per square feet has moved over the few quarters. Similarly, for telecom companies, it is the average revenue per user (voice / data). To put it in the simple words, sales growth is a result of price and volume growth. And, if the growth is driven by volumes, it is considered as good. In the case of the price growth, if the company is able to pass on the additional raw material cost to users it is considered as positive.

Further, to extend on same lines, segment wise performance analysis is also important. Shree Cement has Power and Cement as major segments. In Grasim also, there are four segments. Analysing which segment is driving growth is very important. In simple terms, one poor segment may be a drag on the overall performance of company despite other segments performing well. Apart from this organic and inorganic growth (through acquisitions) should be adjusted for.

Other Income

Next important parameter is other income. We have to closely analyse the contribution of other income to the profitability. If the other income is regular (despite higher contribution to profitability), it is not alarming. In the case of Banks (other income is an integral part) and few companies with subsidiaries (providing dividends) it is a common scenario. However, if there is frequent fluctuation in other income, we need to be a bit cautious.

Expenditure

While income is an important part where growth is important, expenditure is where the company needs to remain very vigilant. If sales is increasing, naturally expenditure would also increase. Hence, in the case of manufacturing companies, we have to consider the expenses as a percentage of sales. How much extra sales requires extra expenses. If the percentage remains same or lower, it is considered as a positive factor. In expenses,the focus also needs to be on how much is being spend on employees. Usually, for a company in a growth mode, it increases every quarter.

Further, the expenses also comprise of depreciation amount. There are two aspects to it. The first factor is that the increase in depreciation amount indicates that there is capex being undertaken. This indicates towards company’s expansion plans. The second factor is that this impacts the profitability but we have to look at the cash profit generated as depreciation is added back. Hence,the depreciation is an important parameter to be analysed. In the services sectors like IT and Banking, it does not make an impact. However, in Telecom, which is a high capital intensive industry, the depreciation figures are important.

In the current scenario, when most of the companies are reeling under debt pressure, the interest cost becomes an important figure. Any reduction in the debt cost is considered as a positive factor for the company. Currently, many companies are undergoing debt restructuring plans,and it directly impacts interest cost. In Banking and financing companies, it is an integral part of the business and hence needs to be looked differently.

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