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How to Master Analyzing the Balance Sheet – Part 2

A few days back, I had posted a video on how to analyze the balance sheet on the Equities and Liabilities side.

In continuation of that series, here are two videos on how to analyze the Assets side of the balance sheet.

Given my habit of speaking too much when no one is listening :-), I have divided the explanation in two parts.

Watch the following videos – Parts 2 and 3 of this series – and deepen your romance with the balance sheet.

If you can’t view the videos below, click to view Part 2 and Part 3. Also, please don’t forget to turn on your speakers.

How to Read a Balance Sheet – Part 2

How to Read a Balance Sheet – Part 3

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.

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.

Alternatively, you can download the videos straight from this link.

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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. You have explained clearly what each of the situation or change in the balance sheet means. This is a very useful cheat video for me without taking up a college course in analyzing account statements. Atleast, now I know a lot more about the balance sheet. Thanks to you. Cannot thank you enough. I see what is wrong with Opto circuits.

    Keep up the good work. Best wishes.

  2. Hi Vishal,
    Wonderful and crystal clear explanation jus like your previous video. However, because of my poor knowledge (and non-commerce background), I have some questions. I apologise in advance for questions I am about to ask as they might be really dumb for others:
    1. a. How can a company value its own good-will?
    b. Since goodwill is based on premium over net worth, how to value goodwill of a company which is never being bought? (Similar to part a)
    2. How are intangible assets of a company valued?
    3. When parent company acquires another company and adds goodwill in its assets, does it also add the same amount in its reserves? (You explained it in video, but still needed confirmation on my understanding)
    4. How does a company decide on what depreciation rates to fix? Since depreciation rates of company and govt are different generally.

    I apologise for asking a lot of questions, but your video did initiate a lot of thought process in my mind creating these doubts.
    Many thanks in advance Vishal. Your videos are boosters of financial clarity for me and have motivated me to put my head in number crunching game.

    Regards,
    Vikas Kukreja

    • Hi Vikas,

      Thanks for your feedback on the videos! Here are my answers –

      1. a. How can a company value its own good-will?
      There are two kinds of goodwill in the balance sheet – the first one is shown as intangible asset and is representative of the respect the company commands in the market. Like there are ways to value the brand and customer relationships, there are ways to measure goodwill.

      The second type of Goodwill – Goodwill on consolidation – is usually the bad kind of goodwill, for it is a measure of the excess money the company has paid to acquire another company. This is the excess of market price the company has paid over the assets of the acquired company. So this is easy to value.

      b. Since goodwill is based on premium over net worth, how to value goodwill of a company which is never being bought? (Similar to part a)
      You are talking about the goodwill that forms part of Intangible Assets. As I mentioned, there are ways to calculate the value of goodwill, and it represents the respect the company commands. Like your personal goodwill is the respect you command within your circle of friends and colleagues. This goodwill does not require a company to buy some other company.

      2. How are intangible assets of a company valued?
      There are accounting ways to value intangible assets. I don’t know specifically how they do it, but here is a document that can help.

      3. When parent company acquires another company and adds goodwill in its assets, does it also add the same amount in its reserves?
      In preparing consolidated financial statements, an entity combines the financial statements of the parent and its subsidiaries line by line by adding together like items of assets, liabilities, equity, income and expenses. Then, in order that the consolidated financial statements present financial information about the group as that of one economic entity, the amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary are eliminated. This is when goodwill arises.

      4. How does a company decide on what depreciation rates to fix? Since depreciation rates of company and govt are different generally.
      Depreciation rates are fixed for specific assets both as per Companies Act and IT Act. So companies calculate based on both rates and thus there exist Deferred Tax Assets or Liabilities. A lot of companies (like those from the Reliance Group) change their depreciation policies (how they calculate depreciation; there are two main ways – straight line method and written down value method) very frequently. So when business is weak, they depreciate their assets slowly to show higher profits.

      I hope these answers satisfy your queries. Let me know if there’s anything else that bothers you.

      With respect,
      Vishal

      • Sanjeev Bhatia says:

        Interesting questions and equally adept answers.

        My Query on Goodwill… Since it is purely subjective, how to treat the Goodwill (as also the Intangible assets) part of balance sheet. A company might say it enjoys X amount of Goodwill while the actual case might be quite different. How to remove this lacuna while signalling a companies financials? It has also been seen, more so in case of acquisitions (or Di-worseifications), that the acquirer first pays much more to acquire a company (Inflated Egos??), shows the excess paid as Goodwill in consolidated statements and then write-off the part when acquisition turns sour, thus taking a big hit. Any means to avoid these?

        • Hi Sanjeev,

          The GW that forms part of the Intangible Assets is generally not a big amount. Even in case of OCIL, you will see that its just worth Rs 6 lac. The bigger intangible assets are Brands, Patents, etc. I should know how to value them. BUt I won’t go into such elaboration and rather see the intent of the management from the overall balance sheet. Yeah, if the amount in Intangibe Asset is too large as compared to Tangible Assets, then I may question them to seek clarification.

          As for “GW on Consolidation” that occurs due to acquisitions, since its impairment won’t impact free cash flows, what I will do is take a greater margin of safety while valuing the stock. Moreover, if this GW is too large and which indicates that the company has really overpaid for its acquisitions, I will doubt the management’s cash allocation skills and thus completely avoid the stock.

          Hope this helps.

          Regards,
          Vishal

          • Manish Sharma says:

            The moment I see Goodwill, i remember the torcher i had in my XIIth standard while calculating it and so I avoid the idea completely.. 😉

            It’s much easier to stay out of trouble than to get out of it – WB

  3. Sanjeev Bhatia says:

    At Last one of my very old request is being fullfilled… 🙂

    Chalo der aaye, darust aaye 😛

    Thanks for taking time off your really busy schedule to create and post the videos. Really appreciate the effort to educate us novices.

    Thanks a tonne.

  4. Vishal, I am hoping you are going to end this series with actually trying to value the company and the intricacies of valuing the company.

  5. Hi Vishal,
    Many thanks for answering my queries. Your videos have really cleared many concepts and doubts. I would request to have similar videos on cash-flow statements also, since thats another area of complexity for me. As they say “yeh dil maange more” :-). Your videos are those lectures which I would never like to bunk 🙂 Enlightening and practical.

    Regards,
    Vikas Kukreja

  6. Reni George says:

    Hi Vishal
    Good Evening to you

    Well just completed the second video,the third one is remaining,that i will watch tomorrow,as its 11 in the night and if i watch that also,then subah breakfast chance are less…hah aha joking

    On a serious part…I was thinking,Don’t you thing the promoters use the goodwill on consolidation to siphon off the money from the company’s cash.Let us put it this way.The CEO or the owner of the company A scouts for a buy and he finds B,He approaches the company B and tells them that though the valuation of the company is 10 Million,he is ready to pay 20 Million,out of the extra 10 million,the Management of B company can keep take an extra 1 million and have to transfer the remaining 9 Million into an offshore account of the CEO or the owner,which is equivalent to money laundering.Don’t you think this is also one of the devils of acquisitions.

    Just look at the lifestyle of some of the CEOs of the company,though the company is short of working capital or is unable to service its loans or is unable to pay salaries to its employees ,but they jet set in business class with some eye candy’s in expansive locales of the world enjoying their life.So its Correctly said,the business might crash,but the businessman won’t.

    Thanks and Regards

    Happy Investing
    Reni George

    • Agree. This is a possibility and may well be rampant. Similarly overinvoicing of imports and underinvoicing of exports though neither would contribute to intangibles.

  7. Some classroom this ! Great job as always.
    Some of the points you made are very valid and are good starting points.
    You are bang on that misuse creates frauds so intent is something which is always at a premium and the moment you lose trust little else is left.

  8. sanjay says:

    Hi Vishal,
    Excellent videos. This 100 mins of videos cover more than a month/ 2 month of work for a part time like me. Thanks a lot 🙂
    I have a request. It would be very helpful if you could present Investment analysis of a some example company through a video. You already have put some amazing material on your website. Able to see your analysis and explanation through visual will have more impact and it will be more easy for the audience to simulate your thought process.

  9. abhishek dey says:

    Hi vishal,
    This series of videos have been exceptionally enlightening for someone like me with zero knowledge of accounting and hence balance sheets. This ignorance is also creating major confusions when i visit old balance sheets. The heads under which data has been given are all different. Secured/unsecured loans loans never tell me what are the long and short term debts (knowing the difference as I’ve learnt from your video is very important as it clearly puts forward the short vs long term debt situation of a company). trade payables is not there at all, even if its there, the data from the new balance sheets just dont corelate to the old ones. Its very confusing when im trying to see the 10 year picture of the company. For eg. I’ve downloaded the brilliant stock analysis excel sheet from your blog. And i’m unable to fill in the data required under ‘long term borrowings’ heads in that sheet. Please need help in this regard.

    Utterly confused.

    Abhishek

  10. Hi Vishal ,
    Thank you for updating very informative videos. As i am a technical technical analyst active in the market over 3 years didn’t know much about balance sheet and income statement. As i have started following your website I get into more insights of value investing. After watching your videos on balance sheet that could help to look after the company’s BS. It’s more interesting than reading charts.But need lots of patience to really get good returns. Keep up good work sir. Kindly do one seminar or course on fundamental analysis in Bangalore.

    Suresh
    8861128028

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