Although, there are lot of financial terms that we come across while reading the financial statement of any company. That’s where it comes handy if you know the meaning of those terminologies. In this blog “5 useful Financial Keywords to understand public company!”, I will try to cover any five of them.
5 useful Financial Keywords to understand public company!
1. Standalone Sales > Consolidated Sales?
Standalone sales mean the sales of the one company which is the main listed company (Parent A).
Consolidated sales mean the sales of the main company(A) along with its subsidiary companies (Subsidiaries B & C).
You might be thinking how can Consolidated sales(A+B+C) be less than Standalone sales(A)?. Although, for profit after tax it’s quite possible in case B & C are into losses.
Now, here is the interesting & the logical part, there are lot of transactions happening between parent & subsidiaries. Quite possibly, this can be the majority of revenue for the company if one is selling most of its product to its subsidiaries /parents (Tinplate which sells most of its product to Tata Steel). That’s why to give a fair picture of the company’s sales, the accounting standard requires the parent to show the consolidated revenue by subtracting all internal transactions between parent & subsidiary/subsidiaries.
Below, I have taken an example of Bajaj Corp & its 3 subsidiaries. As you can see the sales of Bajaj Corp on a consolidated basis (₹809cr) is less than the sales on a standalone basis(₹811cr).
And it always sensible to look at the Consolidated numbers as they give a better representation of the company.
For example, Rain Industries had revenue of just ₹59 cr on a Standalone basis but if you look at its consolidated revenue which includes turnover of its 35+ subsidiaries the consolidated revenue comes to be at ₹11447 cr.
Bajaj Corp- Standalone Sales
Bajaj Corp- Consolidated Sales
2. Purchase of "Stock in Trade/ Finished Goods"
It represents the purchase of finished goods. It is the finished goods purchased by the company for trading or for completing the final product.
VIP Industries imports finished soft luggage from China
3. Change in inventories of finished goods, work in progress & stock in trade
If it’s a manufacturing company, it’s not possible for them to produce exactly the same volume which matches sales volume. There is always some difference. For example if company A sales 100 units of one product in a year, its possible they manufactured 120 but sold only 100. Also, it’s possible to produce only 80 and still sell 100 by using inventory unit of 20 of previous year.
Also termed as “Increase/Decrease in stocks”, increase would mean subtraction and decrease means addition.
4. Borrowing Cost Capitalization
Certain kind of qualifying asset which takes substantial time to get ready to be put to use. Borrowing Cost associated with such assets can be capitalized i.e. it can be subtracted from P&L from the Interest expense & added to Balance sheet(Fixed Asset).
Borrowing Cost that can be capitalized:
Processing charges
Stamp duty
Interest payment till the asset is ready to be used
Forex differences
Once the asset is ready to use, the capitalization needs to be stopped. It needs to be halted even if there is some temporary stoppage of work.
5. Share Buyback
Share buyback refers to the Company (Not the promoters) buying back the company’s share from the open market. It reduces the number of outstanding shares available in the market. Thus, improving the Earning per share of the company i.e. profitability per share.
Also, the cash to be used for buyback can be used to acquire other company etc but buyback in a way implies the best available option for the promoters to utilize the cash through the company to acquire its own shares in the market. This implies, the confidence or the believe in the better prospects of the company.
Eg: The Graphite electrode company ” HEG” recently announced buyback of shares to the tune of ₹750 cr from the open market rather than acquiring any other company, thus implying best company for the management to invest/acquire is HEG itself.
Further reading:
By,
Shekhar Yadav