How to Read the Statement of Profit and Loss

Statement of Profit & Loss (P&L), as the name suggests, gives the summary of incomes and expenses arising during a particular financial year for a business. When the net income (i.e. income minus expenditure) is positive the company is in Profit and when the net income is negative the company is said to have incurred a Loss.

There are several types of expenses listed under the ‘Expenditure’ section of P&L Statement. When you are a beginner, you need to broadly understand the difference between these types of expenses in order to assess their impact on company’s future and present profitability.

Certain expenses are operating in nature i.e. the company spends this money for day-to-day operational activities of the business like salaries, power, fuel and administration. But certain expenses are non-operating in nature in the form of financial expenses of the business like payment of interest on loans taken to fund the investments of the business.

This classification is done to report a company’s operating and non-operating profit separately so that investors can measure the soundness of running the core business. Let us take the example of Tata Motors Ltd. (TML) whose core business is manufacturing and sale of automobiles like passenger cars and commercial vehicles. In a particular year TML might generate huge operating profit but its net profit after taxes (PAT) might be low due to the burden of financial expenses like interest and taxes. In financial year 2014-15 TML had a favorable operating performance (Rs. 644 Cr) yet a net loss (negative Rs. 4739).

Tata Motors Ltd. Statement of Profit & Loss for 2014-15 and 2013-14

Particulars For Year Ended March 2015

(Rs. Crs.)

For Year Ended March 2014    (Rs. Crs.)
Gross Sales              39,524              37,758
Less: Excise                3,230                3,470
Net Sales              36,295              34,288
Expenditure:    
Increase/Decrease in Stock                  (734)                   303
Raw Materials Consumed              27,920              25,543
Power & Fuel Cost                   396                   392
Employee Cost                3,091                2,878
Other Manufacturing Expenses                3,552                3,392
General and Administration Expenses                3,244                2,811
Selling and Distribution Expenses                   745                   612
Miscellaneous Expenses                   435                   262
Expenses Capitalised                1,119                1,009
Total Expenditure              37,532              35,184
PBIDT (Excl OI)            (1,237)               (895)
Other Income                1,881                3,833
Operating Profit                644             2,938
Interest                1,612                1,353
PBDT                  (968)                1,584
Depreciation                2,603                2,070
Profit Before Taxation & Exceptional Items               (3,571)                  (486)
Exceptional Income / Expenses                  (404)                  (540)
Profit Before Tax            (3,975)            (1,026)
Provision for Tax                   764               (1,360)
PAT            (4,739)                335

 

 

Let us take a closer look at TML’s P&L Statement. When we look at the statement for the first time it might appear intimidating. But let us look at some key financial numbers line by line and learn how to read a P&L Statement of a listed company.

  1. Net Sales are sales minus excise duty (a kind of tax on manufacturing activity). Net sales are nothing but net income of a company for a particular financial year.
  2. When a company has stock of raw material and finished goods the value of change in inventory is treated as expenditure (on income). Apart from inventory and raw material costs there are other expenses like power, fuel, salaries, administrative and miscellaneous costs.
  3. Other income for the company is in the form of interest or dividends which it earns on investments it has made.
  4. Operating Profit/Loss is the difference between Net Sales and Total Operating Expenditure (Rs. 644 Crs. 2014-15).
  5. PBT or Profit Before Tax is the profit arrived at after deducting interest and depreciation from Operating Profit. In case of TML it has incurred a loss of Rs. 3975 for 2014-15.
  6. The Net Profit is often called as PAT i.e. Profit After Tax which is PBT minus provision for taxes which the company is supposed to pay to the government. One needs to note that this is a provision for taxes and not actual tax payment. The provision is made for payment of taxes in future hence we can find a provision being made even during the year when PAT is negative.

 

This brief discussion on P&L Statement will act as an ice-breaker for looking at further details of a company’s financial health before you invest your wealth in that company.

About the author: Prof. Anil Kshatriya works as Assistant Professor in the area of Finance at Institute of Management Technology, Nagpur. His teaching and research interests include Managerial Accounting, Management Control Systems and Strategic Management. Prof. Kshatriya is a professional accountant (CMA India) having associate memberships of Institute of Cost Accountant of India (ICAI) and Chartered Institute of Management Accountants (CIMA UK). His industry experience includes working as cost accountant with the Auto Sector at Mahindra Group. Prof. Kshatriya teaches courses in Accounting and Strategy at IMT.

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