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Basics of Balance Sheet

What is Profit before Tax (PBT)?

Deducting Interest and Depreciation/Amortization from EBITDA and then addition to other income to it lets us know the total profit of the company for the period after gathering all the payments. Taxes need to be paid on this profit and consequently it is called as PBT.

In the above illustration, PBT is Rs. 45.

Tax: This is the money which goes to the administration. Currently, corporate tax rate in India is 30% as per the last update.

Profit after Tax (PAT):

This is the concluding residual sum which residues with the company after paying all its stakeholders other than shareholders.

This is the shareholder’s money and may be paid out as dividend or may be reserved in the company to some extent or completely for additional expansion.

In the above illustration, this outline comes at Rs. 31.5.

What are the Basics of Balance Sheet (B/S)?

A Balance Sheet has the sources of funds for a company and application of those funds at any given time. As it is reasonable, basis of funds and their application must match at collective level, therefore, both the sides of the balance sheet must match at all times according to the name given.

Find the below is a illustrative balance sheet:

Sources (Liabilities) Application (Assets)
Equity (a) 100 Fixed Assets (f) 200
Reserves & Surplus (b) 28 Current Assets (g) 50
Net-worth (c) = (a) + (b) 128
Long Term Debt (d) 100
Current Liabilities (e) 22
Total (c) + (d) + (e) 250 Total (f) + (g) 250

Sources of Funds:

A company has two chief sources of funds, owners’ funds or equity capital and borrowed funds or debt capital. Let us discuss each one mentioned below.

Equity:

This is the money which the promoters bring into the business when it is launched, and consequently by further shareholders as and when necessary, who also become owners of the company to the point of their shareholding.

This is the owners’ investment in the business. A boost in the equity capital may weaken the balanced holding of existing shareholders and consequently their contribution in the profits of the company.

A intensity can happen as of added share capital being raised or a conversion of debt into equity.

In the above illustration, we have Equity as Rs. 100.

What is Reserves & Surplus?

When the company makes profits, they are stimulated each year from the P/L statement into the balance sheet under the head ‘Reserves & Surplus’. Consequently, this is also shareholder’s money, which they decided to keep in the company and put into in the business.

While equity may be known as given capital, reserves and excess is known reserved capital.

Apart from the reserves created out of reserved profits, the balance sheet may show other reserves such as share premium reserve which is gathered when shares are issued as premium to face value or a revaluation reserve, which are not created out of the profits obtained.

In the above illustration, we have R&S = Rs. 28.

What is Net-worth?

Equity Capital and Reserves & Surplus jointly symbolize Shareholder’s Funds as well called as Net-worth or owners’ capital.

In the above illustration, adding Equity Capital of Rs. 100 and R&S of Rs. 28, we get Net-worth (Shareholder’s Funds) as Rs. 128.

What is Long Term Debt?

In order to be precise, whichever debt taken for a period of more than 1 year is measured to be a non-current liability or a long term loan practically. This may be in the appearance of term loans taken from financial institutions or debt securities issued such as debentures. Investors favour companies with low liabilities. On the other hand, the scenery of the business and the lifecycle of the company may read aloud the level of debt in the balance sheet.

Industries like Business Process Outsourcing (BPO), IT, education etc. Do not necessitate huge investments either in capital assets or for acquiring raw materials and other expenses.

Therefore, such sector usually exhibits a balance sheet which has very low long term debt.

If a company has high debt in this division, it would usually be temporary for development purpose when the company is in the growth stage.

Companies in the banking and non-banking sector cannot be evaluated on this parameter as their business necessitate them to acquire long term deposits, which are then disbursed as loans.

Heavy capital goods based manufacturing companies need to have a sensible combination of debt and equity, based upon project, type of industry, interest rates, etc.

In the above illustartion, Long Term Debt is Rs. 100.

What are Current Liabilities?

These are liabilities or payments, which have to be complete within a year. Salaries, Utility payments, Trade payables, working capital loans, short-term debt raised through the issue of commercial papers, unclaimed dividends, maturing long term debt and others are typical examples of current liabilities.

Current liabilities are examined to determine the efficiency with which the working capital is managed. For instance, the Trade payables days calculated as trade payables/Cost of sales x 365 days, is the time taken to pay the suppliers.

Lofty number points out in the direction of that the company is in a good position and is able to get credit from its suppliers without tying up its cash.

High trade payable days should be investigated to see if the company is facing a fund crisis or even bankruptcy.

In the above ILLUSTRATION, Current Liabilities stand at Rs. 22.

What is Application of Funds?

This is the right side of the Balance Sheet, where particulars of assets are given. A company can have fixed long term assets like plant and machinery or short term assets like investments in liquid funds or inventory.

The two broad beginning of Application side of the balance sheet is mentioned below:

What is Fixed Assets?

These are assets which a company put together to create goods and services. A manufacturing plant would require heavy machines, a software company would need computers, a real estate company would need land, etc. these are all assets from which the company would produce revenues.

Furniture and vehicles are assets which are essential by all companies. Even though these assets do not make revenue, they are necessary part of business.

In the length of with tangible assets such as plant, machines, cars, furniture, computers etc., some balance sheets may also own intangible assets such as patents, licences, brand value and others.

The asset turnover ratio, calculated as sales/fixed assets, shows the competence of the assets shaped by the company in creating the revenues.

In the above illustration Fixed Assets are at Rs. 200.

What is Current Assets?

Current Assets are those which can be transformed into cash within a year. Inventory, trade receivables, investments, short term loans and advances and cash are all illustrations of current assets.

Current assets analysis is significant to recognize the working capital situation of the company.

A big level of inventory or trade receivables may mean capital tied up and the company may be paying a high cost for debt.

Examining the current assets comparative to past trends and peer group companies will give nearby into the working capital management of the company.

Lower inventory days and trade receivables days portend well for the company.

In the above illustartion, Current Assets are Rs. 50.

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