Premium Value Investing NewsletterDownload Free Issue

How to Master Analyzing the Balance Sheet – Part 1

Here is what Mr. LS Chauhan, a tribesman, wrote as a comment on my latest post on Opto Circuits“Could you please consider taking OCIL balance sheet as an illustration while you post your next lesson on ‘How to read a balance sheet’.”

So here is a video I have prepared to help you understand the Balance Sheet, and through the example of OCIL’s balance sheet. 🙂

Since explaining how to analyze a complete balance sheet would have taken a lot of time, in this video I explain how to look at the “Equity & Liabilities” side of a balance sheet. I will take up the rest of the analysis – of the Assets side – in a subsequent video.

Anyways, as they say, to know how good a job a manager did, you have to have a good idea how much risk he took.

In the same way, to know how good a business a company is doing, you have to have a good idea how much risk it carries on its balance sheet.

The “Equity & Liabilities” side tells you exactly that.

So watch the following video and get into a lifelong romance with the balance sheet.


If you can’t view the video above, click here. Please don’t forget to turn on your speakers.

In case you are not able to see a clear video, just click to play the video and then change the quality to 480p or 720p (Click here to know how).

Let me know if you found the analysis easy (or difficult).

Post your feedback or any question you have in the Comments section below. I’m all ears.

By the way, I have relaunched the Safal Niveshak Forum…this time on Google Groups. You can sign in and start contributing to the Forum by clicking here.

Note: Many tribesmen have asked me how they can download the videos and see them at ease. Well, you can do this through Freemake Video Downloader, which you can download for free on your PC.

Print Friendly
About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Amazing video, Vishal! I have never heard or seen a more clearer explanation of the balance sheet.

    Kudos to you for making this seem like a cake walk. Of course, now it is up to us to practice analyzing the balance sheet the way you have taught, in order to master it.

    Looking forward to your next video on analyzing the assets side. Thank you so much! Cheers.

    • Thanks Anand for your kind words! Regards.

    • Hi Vishal,

      I feel extremely ashamed… Today, I gave you the feedback that I need help understanding balance sheets and that you were not helping me achieve this. And now I find this treasure trove of information, simply and clearly put across.

      Wow!

      Actually, I was only going through the 20 posts that came every week, and I did not browse your website thoroughly.

      My sincere apologies…

      Keep posting such AWESOME videos,

      So, just like the balance sheet, it pays to dig through all the posts in your website! 🙂

      Cheers,
      Bharat

  2. Reni George says:

    Good Evening Vishal
    My son is sleeping besides me on the bed,and I am watching this video of yours.I would like to point out that,if the balance sheet was deciphered in such a lucid way during my school days by my sir in the accounting classes,then my balance sheet would have tallied.Actually right now I saw one companies balance sheet,which matched the balance sheet that i made in my class XI,well that company is “Deccan Chronicles”,we students used to say like this “Todo,marodo,khilao,pilao kuch bhi karo,par balance sheet match karon…..

    One thing is for sure,at the end of your this lessons,many of the tribesman are going to decipher the balance sheet in a nice way and are going to cross check umpteen points of time before they make their investment decisions.

    Kudos to you for carrying on this

    I would like to thank you on behalf of all the tribesmen.Carry on Jack

    Thanks and Regards
    Happy Investing

    Reni George

  3. Beautiful narration, Vishal! Need your permission to show this video for my upcoming Finance project in my MBA class.

    Thank you for this…and so many wonderful things you are doing selflessly for the small investor. Have a nice day!

  4. Thanks for this very educative video. Really generous of you…

    Regards,
    Rajaram

  5. Sandeep Khode says:

    Thanks Vishal for sharing this video. It was very informative. And although from non-finance background, I understood it.
    Looking forward for more such educative sessions.

  6. Hi Vishal,
    First of all, take a bow from me! As once Einstein said ” Make a thing as simple as it is, but not simpler”. You have brought down the explanation of BS to simplest way to understand for anyone keeping all the points and risks intact. I have learnt many new things from this video and would like to thanks a lot for sharing it. Especially consideration of Debt/FCF was an important learning. Waiting eagerly for second part 🙂

    Vikas Kukreja

  7. Marshal Mi Suit says:

    Very useful video. Very clearly explained. Your website is very useful for individual investors. You are doing a very generous thing by sharing your knowledge and skills with us. Thank you! Thank you! Thank you!

  8. R.K.Chandrashekar says:

    Thanks Vishal for this lucid presentation.
    Attn: Fellow tribesman- please analyse the health of a company via a balance sheet before investing, lest you would get short circuited!!

  9. Abhishek N says:

    Hi Vishal,

    Thank you for this superb video on Balance Sheet. As I am fresh into fundamental analysis, this video along with your previous video is helping me a lot.

    I have one doubt regarding FCF. In all FCF statement available online, FCF is taken simply as the Net increase in Cash & Cash equivalent of the Cash Flow statement. Which is the correct way of calculating FCF & which FCF to use for calculating Discounted Cas Flow.

    Thanks
    Abhishek N

  10. L S Chauhan says:

    Dear Vishal,
    1.I was a science student and I never had a brush with commerce. Few years back, rather late in life, I started trying my hand at investing and started reading stuff in newspapers and periodicals. I have never come across anything that wanted to know at any one place. What you are doing here on this site is unmatched. I can’t thank you enough for explaining the balance sheet so lucidly.
    2. Please pardon my ignorance as I need a few clarifications :-
    (a) Does ‘Reserves & Surplus’ mentioned in ‘Shareholder’s Equity’ exist as cash and therefore available to the Company ? If so then then cash available with Company is 1464 Cr+174 Cr. From what I have understood, at least the P & L account balance of Rs 961 Cr should be available to the Company.Or has it been converted into assets and not available to the Company any more ?
    (b) The Company is not generating enough cash to meet even its working capital requirements. Then how has the debt burden ratio gone down from (9.6) in 2011 to (5.4) in 2012 (as shown in your excel sheet)?
    (c) I may be running ahead of my lessons and knowledge but I thought a clarification or two regarding asset part of the bal sheet may be relevant here. Is ‘Trade & Receivables'(846 Cr), an amount due to be received by the Company for products already delivered to the customers ? Also inventory (511 Cr) is ‘products which have already been produced and waiting to be delivered/sold’. So Company does not need any more working cap to produce them. If my understanding of the issue is correct, then can we say that this figure (receivables + inventory) caters for the long-term and short-term debt put together, without taking the cash of 174 Cr into account.
    (d) I could not understand how has the subscriber’s premium gone up. When Company came with IPO, share holders paid face value + premium. Subsequently, however, when Company gave bonuses, no premium was paid. So how did the premium go up ?
    (e) one last one (for now)! Dilution of equity is bad. How ever, in case of Opto all dilution seems to have taken place due to declaration of bonuses.If true, this should be value neutral. Am I missing something here ?

    3. In one session you taught me more than what I have learnt in years. Given the limitations of language in sometimes expressing one self, all I can say to you is ‘Thank You’. I am grateful for your lessons. Regards.

    • Not sure what you mean by debt burden ratio, I am assuming you are talking about debt to equity ratio. it can go down if you increase the equity. aka sell more stock.

      Is ‘Trade & Receivables’(846 Cr), an amount due to be received by the Company for products already delivered to the customers

      yes

      point c ) Can you be more specific.

      • L S Chauhan says:

        Dear Krish

        1. Thank u for taking the time to reply. The point I am trying to make in Para 2 (c) of my query is as follows:-

        * ‘Trade & Receivables’ – if this amount is due to be received by the Company, then should it not be subtracted from it’s short-term debt (working capital), to get the correct picture of Company’s over-all debt ??
        * Inventory – Similarly, inventory constitutes of products which the Company is holding. They are either due to be delivered against an order or held as reserve for an anticipated order. The working capital expenditure required to produce the inventory has already been incurred by the Company. While the expense has been taken on the books, income from sale of this inventory will come in future.

        2. The short term debt of the Company is 764 Cr. Against this, Company is awaiting payment for products worth 846 Cr (Trade & Receivables) and also holding an inventory of goods worth 511 Cr. If my interpretation is correct, then the debt on the books of the Company should not be a problem. But I am not too sure if I am reading this correctly.
        Thank you your reply. Regards

        • Dear Mr. Chauhan, thanks for your feedback!

          Here are my point by point replies…

          Does ‘Reserves & Surplus’ mentioned in ‘Shareholder’s Equity’ exist as cash and therefore available to the Company?
          The “cash” represented by these Reserves & Surplus is in the company but is employed in either current assets (debtors. inventories, bank accounts, investments etc.) or fixed assets. This is not readily available cash with the company.

          If so then then cash available with Company is 1464 Cr+174 Cr. From what I have understood, at least the P & L account balance of Rs 961 Cr should be available to the Company.Or has it been converted into assets and not available to the Company any more?
          As I mentioned, this cash is stuck in inventories, debtors etc.. When these current assets get converted to cash, that is when it will be “real” cash. In many cases for most companies, some debtors never pay and some part of the inventory gets lost as wastage or is never sold. So till these are debtors and inventories, we can not consider them as “Cash”.

          The Company is not generating enough cash to meet even its working capital requirements. Then how has the debt burden ratio gone down from (9.6) in 2011 to (5.4) in 2012 (as shown in your excel sheet)?
          The negative numbers are to be ignored. In fact, OCIL’s debt (numerator) increased in FY12 but its negative FCF (denominator) increased at a bigger rate, and thus the decline in the debt burden ratio.

          (c) I may be running ahead of my lessons and knowledge but I thought a clarification or two regarding asset part of the bal sheet may be relevant here. Is ‘Trade & Receivables’(846 Cr), an amount due to be received by the Company for products already delivered to the customers ? Also inventory (511 Cr) is ‘products which have already been produced and waiting to be delivered/sold’. So Company does not need any more working cap to produce them. If my understanding of the issue is correct, then can we say that this figure (receivables + inventory) caters for the long-term and short-term debt put together, without taking the cash of 174 Cr into account.
          Let’s take this up in the next video so that I have some thing to explain there. 🙂

          (d) I could not understand how has the subscriber’s premium gone up. When Company came with IPO, share holders paid face value + premium. Subsequently, however, when Company gave bonuses, no premium was paid. So how did the premium go up?
          This has been due to conversion of warrants into equity shares, which happened in 2009, 2010, and 2011. Plus there were an issue of shares to institutional investors that added to the share premium.

          (e) one last one (for now)! Dilution of equity is bad. How ever, in case of Opto all dilution seems to have taken place due to declaration of bonuses.If true, this should be value neutral. Am I missing something here?
          In OCIL case, yes it’s mostly on account of bonus so value neutral. Some dilution has been due to above mentioned reasons – warrants and QIBs.

          I hope this helps.

          Regards,
          Vishal

          • L S Chauhan says:

            Thanks Vishal.
            What you are basically saying regarding ‘receivables’ & ‘inventory’ is that, ‘there is many a slip between cup and the lip’. Well! I have to agree. Looking forward to your next video.
            regards

  11. Hi Vishal,

    Absolutely top class stuff.
    Thanks for sharing the video.

  12. Amit Goyal says:

    Vishal Ji,

    We have now become Addicts and are now craving for the Asset and the Cash Flow analysis parts !! Keep up the good work !! 🙂

    Regards,

    Amit Goyal.

  13. Hi Vishal,
    I googled and read many stuff with respect to Dissecting Blance sheet. Being novice in accountants, it was hard to digest. But this video helped me lot to understand basics and advanced. I look forward the continuation of series, i will use this for my kids education tooo. Please do not take more time for next series.
    Few feedbacks, u can use legible colors which can help a lot. Please site a parallel example for different kind of industry such financial company, manfacturing, serices company. So we can understand it better. it becomes one shop to learn….thanks a lot once again.
    Presenter has lot of common sense.

  14. Dear Vishal ,

    Millions of thanks for such a wonderful ,simple & yet most powerful video presentation to understand Balance sheet & its usefulness in analysis company.Most Imp gain was Debt/FCF .Keenly waiting for Second part .

    Regards,
    KIRAN

  15. vivek kumar khandelwal says:

    superb !!!!!!!! d way u r explaining all thing is really good…..thank u Vishal Sir 4 creating such a wonderful blog for small investor.

  16. vivek kumar khandelwal says:

    one more thing I want to ask…..as I am a student and I am saving rs. 1000 every month from my pocket money…..where should I invest my savings ?

    • Invest in Nifty Bees

      • vivek kumar khandelwal says:

        How to start invest in Nifty Bees

        • Open a demat account and directly buy Niftybees shares. You can have a fixed schedule that you will buy 10k worth of niftybees at the start of the month.

          The only expense you have to pay is the brokerage which can range from .2% to 0.5% and the yearly demat charges which are around 500 bucks.

  17. rakesh kumar gampa says:

    Excellent video….I have been waiting for this video from u sir…thanks a lot…eagerly waiting for the assets side video…thanks again…

  18. Simply wonderful!

    Being a person from non-accounting skillset, but having a great curiosity on investment related subjects, I learnt to understand the strength of the BS through my own effort. That took around 3+ years and I am still scared to read through L&T’s AR. But simpler balance sheets of companies like VST, Colgate-Palmolive always helped me to interpret some of the ratios and understand their strengths and relate it other other companies eventhough they are in different sectors.

    But the 45 minutes I spent viewing the video helped me to increase my confidence that I am on the right path. I have already added your video to my favourites.

    Like the way we have to read the Intelligent Investor on regular basis to keep ourself grounded, I shall view your videos on regular basis to incrementally increase my knowledge for every point I may have overlooked at this moment.

    A big Thank you for your efforts to prepare the video and share it with us.

  19. Shamil Abdul Kader says:

    Very informative video. The information on Debt/FCF is very useful. Thanks for sharing.

  20. Abilash Cyril Zachariah says:

    A most enlightening education excellent explaination precise and to the point, please continue .. waiting for the next installment. This is a must read for anyone who is really interested in wealth creation …

  21. Dr Nelogal says:

    Sir,
    Excellent tutorial ,many many thanks for telling it in a simple non-hurried way so that even a person of non financial background can understand..
    Looking for your next video.
    With regards.
    Dr Nelogal.

  22. Hello,
    Thanks for detailed explanation. After listening all through the video, I went through all of my portfolio holdings to check do I have any more black sheeps ( I had Opto as well but sold off at around 92-93Rs) booking a loss of around 50%. Well, I am not much concerned about that loss, cos without which I would not have understood values behind cash flow. Now most of the reports by brokerages are against Opto about its cash flow standards but the very same brokerages were recommending those months back. I do not see much difference now and then (year back) in their cash flow. I do not understand why this erupted now and why not before… that explains inefficient markets.Well, now I took have Balkrishna Industries for which cash flow looks almost bad as in Opto. Heavy debt in books, cash flows that cannot tide over debt (loans) atleast in near term. Please let me know your review, just to make sure my findings. Thanks.

  23. Saw it today. I complement you, on the same. A very well presented video. Thanks

  24. Hi Vishal,

    Thank you for the video posted on analysing liability side of Balance sheet. May be it is a late query but would appreciate if you could provide your comments.

    While calculating Debt-Equity Ratio or for that matter computing the Debt figure, shouldn’t we consider the current maturity of long term debt appearing in “Short term Provisions” also.

    Separately, want to really thank you for doing a wonderful job on Safal Niveshak. I have really found it to be very useful. I would love to meet you some day.

  25. Hi Vishal,

    This was a clear and lucid explanation. Thank you.

    Reagrds

  26. hi Vishal,
    Thanks for the wonderful video. It required lot of patience to keep on speaking and explaining it for more than hour and half( combining all videos)…
    It really helped me to understand the basic of balance sheet and the only thing i have learnt is if your basics are right you can lay a very sucessful building on it.
    Just one request. Can you please post all the parameters which were in your excel sheet like Debt/Equity Ratio, Debt/FCF ratio.

    THanks
    Saurabh

  27. Simply superb !! Simply simple !!!!

    Appreciate the time n effort you are putting in to help complete strangers.

    I’m the latest addition to the fanclub / study group / tribe 🙂

    Regards
    Roshni

  28. Hi Vishal,

    Small question on the Debt burden ratio. You have calculated FCF as “Cash flow from operations” – ” Capex”. However “Cash flow from operations” already accounts for the “Interest paid on borrowings”.
    Shouldn’t we add back the tax adjusted Interest paid to calculate FCF ? which in this case is a big no.

    Thanks,
    Kislay

  29. Vipul Kapadia says:

    Dear vishal sir

    In life , a person who gives us knowledge is our guru , excellent video to simplyfy financials of company.

    Thank you sir

  30. Vishal , you are doing a amazing work ! I like your simple and very precise presentations !

Trackbacks

  1. […] few days back, I had posted a video on how to analyze the balance sheet on the Equities and Liabilities […]

Speak Your Mind

*