Read this small story to brush up your investing knowledge


PL statement and Balance sheet are the two important data sheets to be analysed before investing in a company. Some important terms in PL statement and balance sheet are as follows.
CMP, DEBT, Face value, Book value, COGS, EBITDA, PAT, Reserves, Dividend, EPS, PE ratio
Ok, Let me tell you a scenario by which one can easily understand these terms. For example,
I have started and running a burger company. I have registered it in SEBI and entered IPO (Initial Public Offering) after 3 years .The total fund raised be 1 Lac ₹. I issued 1000 shares of each 100 ₹. Let the current market price of my company's share be 120 ₹.
Assume that I have taken money from the bank which is my debt. The price of the share when my company entered IPO is called Face value. My company went public by raising 1 lac capital through the issue of 1000 shares, so the face value of a share would be ₹10. Book value is the actual price of the share or the actual expenses of a company from 1 share.
Let the cost of making a burger be 20 ₹ which is called as COGS (Cost of Goods Sold). I decide to sell the burger for 50 ₹. After a lot of hard work I sold 1 burger in 3 months. So, the profit should be 30?. Obviously no. Because I need to pay for my employers, maintenance, taxes, interest etc..
So, the 30 which I earned was EBITDA (Earnings before interest tax depreciation and amortization). So after clearing EBITDA, my profit is 10 ₹. This 10 ₹ is called as PAT (Profit after tax). After 3 Quarters, my company made a huge profit out of which I paid repaid my interest and half of my debt. So , some more money will be left which is termed as Reserves.
All is well, So I wish I could do something for my shareholders. So I pay them some percent of money which is called as Dividend. After some months , I see a gradual growth of my company. I see my share price surging. So, what I do, I divide my company's profit with the total number of shares issued.
That gives my EPS (Earnings per share). Apart from these , there is a term called PE Ratio (Price to expenses). This ratio determines whether my company's stocks are overvalued or undervalued.
Alright the story is over, let's analyse my company.
CMP: 120
CMP must be always greater than book value. And yes it is.
Debt : 10,000
Dept should be as low as possible, because only the company is gonna repay it with interest.
Face value: 10
Book value: 65
CMP should never fall below book value.
Cogs : 20
Ebitda : 30
Pat : 10
When they have a better records of EBITDA and pat, it directly means that , the company is good at reducing the taxes. This leads to more profit.
Reserves : 35,000
It should be growing continuously.That's great, cause we have less dept and more reserves
Dividend: 10%
ie , I give my share holders , 10 percent of number of shares bought by them for free. So, there is liquidity in my company. That is necessary.
Eps : 7.5
That's a decent number. Cause, for 100₹ the earning is 7.5 ₹ .
PE ratio : 100/7.5 equals 13.33
That's descent
- These values varies with respect to time.
So, Is it a good company to buy. It can be concluded only by analysing these data for months. Comparison matters a lot. If they are doing good the company's performance is also good.
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