Extracting Data from Annual Report | CASE STUDY: HUL

Summary

In this introductory episode of the Financial Statement Analysis series by Financial Shock Classes, host Shalesh explains the importance of understanding financial statements in a real-world context, especially for Indian companies. The series aims to help aspiring analysts by teaching how to extract, interpret, and analyze financial data effectively. With a focus on Indian accounting standards, the training covers key aspects like revenue analysis, operational income, and understanding financial footnotes. The series promises practical, hands-on learning for those looking to build a career in the investment domain.

Takeaways

• 📊 The series is launched to provide practical insights into financial statement analysis for Indian listed companies.
• 📚 Most students or certification candidates have a theoretical understanding of financial statements but struggle with real-world applications.
• 🧐 The first challenge analysts face is learning how to extract the right data from company filings, investor presentations, and other sources.
• 🇮🇳 Another issue is applying global concepts to Indian Accounting Standards and understanding the nuances of Indian annual reports.
• 🔎 Financial statement analysis involves three steps: extracting data, understanding the data, and analyzing it in relation to the business.
• 💼 The focus of the series will be on case studies of Indian listed companies to provide a hands-on training approach.
• 📈 Revenue is a crucial figure for analysts as it reflects a business's ability to generate cash and impacts its valuation.
• 📄 The difference between standalone and consolidated financial statements will be discussed in future episodes, but consolidated statements will be used by default for analysis.
• 📝 Analysts must learn to read and understand footnotes, as they provide essential context for financial figures such as revenue from operations.
• 💡 Understanding how revenue is calculated according to accounting policies is critical, as it reflects the company’s true earning potential.

Q & A

What is the primary goal of the Financial Statement Analysis series launched by Financial Shock Classes?

The primary goal of the series is to help freshers passionate about building a career in the investment domain to acquire practical skills in financial statement analysis. It focuses on teaching how to extract, understand, and analyze data from financial statements of listed Indian companies.

What are the three key steps in financial statement analysis as mentioned in the video?

The three key steps are: 1) Extracting data from financial statements, 2) Understanding the extracted data, and 3) Analyzing the data by connecting it to the business.

What are the two types of financial statements typically found in an annual report?

The two types of financial statements typically found are standalone and consolidated financial statements.

Why do many candidates struggle when transitioning from academic training to real-world financial analysis?

Candidates often struggle because in academic or certification programs, data is provided for analysis. In the real world, analysts need to source and extract data themselves, which includes finding qualitative and quantitative information from various sources like company filings, investor presentations, and more.

What is the importance of revenue in financial statement analysis?

Revenue is crucial because it represents the only way a business generates cash to fuel its operations and grow sustainably. Revenue also drives a company's valuation and is a prominent indicator of its growth potential.

How is revenue typically broken down in financial statements?

Revenue is typically broken down into two parts: revenue from operations (core business activities) and other income (non-operating revenue). These are detailed in footnotes for more clarity.

What is the difference between revenue from operations and other income?

Revenue from operations refers to income generated from the company's core business activities, such as the sale of products or services. Other income includes non-operating revenue, like interest income or government grants, which are not directly related to the company's core business.

Why are government grants often included in revenue from operations?

Government grants are included in revenue from operations because they are typically given as incentives for a company's core business activities. Therefore, they are treated as part of the operating revenue.

What are the typical components included under 'other operating revenue'?

Other operating revenue often includes commission income on consignment sales, government grants, scrap sales, and export incentives. These are related to core business activities but may not involve the direct sale of products or services.

Why is it important to review footnotes in financial statements?

Footnotes provide critical details about how financial figures are derived. They explain what constitutes specific line items like revenue and provide essential insights into the company's financial practices, which are necessary for thorough financial analysis.

Outlines

00:00

📊 Introduction to Financial Statement Analysis

05:01

📈 Three Steps to Becoming a Financial Analyst

10:02

📄 Case Study: Hindustan Unilever Limited (HUL) Revenue Data

15:05

🔍 Understanding Revenue Components and Footnotes

20:07

📑 Interpreting Operating vs. Non-Operating Income

✅ Key Considerations for Financial Analysts

Keywords

💡Financial Statement Analysis

Financial statement analysis refers to the process of examining financial reports, such as balance sheets, income statements, and cash flow statements, to assess a company's financial health and performance. In the video, this series is designed to teach beginners how to extract, understand, and analyze data from financial statements in a practical, real-world context.

💡Revenue

Revenue is the total income generated by a business from its core operations. It is one of the most important financial metrics because it directly drives a company's earnings and is used to assess its growth. The video emphasizes understanding how to extract and analyze revenue data from a company's income statement, such as that of Hindustan Unilever Limited.

💡Balance Sheet

A balance sheet is a financial statement that presents a company's assets, liabilities, and shareholders' equity at a specific point in time. The video refers to balance sheets when discussing the importance of extracting relevant data for financial analysis and how analysts can derive key insights into a company’s financial stability.

💡Income Statement

The income statement, also known as the profit and loss statement, summarizes a company's revenues, costs, and expenses over a period, showing the company’s profitability. In the video, the speaker explains how to read and extract important figures such as revenue from the income statement for analysis purposes.

💡Consolidated Financial Statements

Consolidated financial statements combine the financials of a parent company and its subsidiaries into a single set of documents. The video highlights the importance of using consolidated figures for analysis, especially when evaluating larger companies like Hindustan Unilever, to get a complete view of the company’s financial position.

💡Standalone Financial Statements

Standalone financial statements present the financials of a single entity without including subsidiaries or other affiliates. The video differentiates between standalone and consolidated financial statements, noting that both are important for analysis but focusing initially on consolidated data for comprehensive insights.

💡Other Income

Other income refers to revenue generated from non-core business activities, such as interest on investments or dividends. The video discusses how other income is reported separately from operating income, and provides examples like interest income from bank deposits or dividends, helping viewers understand how to classify different types of income.

💡Footnotes

Footnotes in financial statements provide detailed explanations of specific items, such as revenue components or accounting policies. The video stresses the importance of reading footnotes, like Note 24 and 25 in the Hindustan Unilever example, to fully understand the breakdown of figures such as revenue from operations and other income.

💡Operating Revenue

Operating revenue is income derived from a company’s core business activities, such as the sale of products or services. The video explains how to extract and interpret operating revenue from financial statements, using Hindustan Unilever’s sales of products and services as an example, and contrasts it with other sources of revenue.

💡Government Grants

Government grants are financial incentives given to companies for specific business operations, often included in operating revenue if they are related to core activities. The video explains that government grants are categorized under operating revenue in Hindustan Unilever’s financial statements, as they incentivize core business functions.

Highlights

Introduction to Financial Statement Analysis series aimed at helping freshers build a career in the investment domain.

Graduation and certification programs provide theoretical understanding but lack practical training on extracting and analyzing financial data.

Challenges freshers face in real-world analysis include difficulty in sourcing data and understanding how to apply global concepts to Indian accounting standards.

The series focuses on a practical, three-step process: extracting data, understanding it, and analyzing it in connection to the business.

The series will provide live case studies of Indian listed companies to show how to apply financial analysis concepts.

Revenue is emphasized as a key figure in financial statements because it directly drives the earnings and valuation of a company.

Distinction between standalone and consolidated financial statements, with the series focusing on consolidated statements for better overall understanding.

Explanation of how revenue is extracted from financial statements, using Hindustan Unilever Limited as a case study.

Revenue is broken down into revenue from operations and other income, with detailed examples from Hindustan Unilever's annual report.

Importance of understanding the footnotes of financial statements to get a complete picture of the revenue breakdown.

Difference between operating revenue, other operating revenue, and non-operating income like interest income, using clear examples.

Scrap sales and other recurrent activities are classified as operating income because they are linked to the business's core activities.

Revenue recognition under Indian accounting standards involves calculating revenue after deducting trade discounts, volume rebates, and taxes like GST.

Presentation of financial statements may vary by industry, with examples contrasting Hindustan Unilever and ICICI Bank's income statements.

Analysts should not blindly accept how a company classifies its line items but should verify them against the footnotes and accounting policies.

Transcripts

hello everyone

my name is shalesh and welcome to

financial statement analysis series by

financial shock classes

in this pilot episode let me begin with

explaining

why we have launched this series and

then we'll follow up with the training

contact

in your graduation curriculum as well as

let's say professional certification

programs you may have studied or rather

gathered a theoretical understanding of

financial statements what exactly is a

balance sheet income statement clash row

statement and likewise

and the way you are tested in these

graduation or professional certification

programs is they'll give you a lot of

data and you will have to calculate

certain ratios and interpret those

ratios and likewise

now these candidates who clear these

programs or graduation content

face a lot of issues when they hit

reality

or hit the ground when they have to

actually analyze a live listed indian

company

this is on back of multiple reasons

first everything was provided as given

information when you are solving

questions however when you hit the

reality you have to learn the art of

extracting data in the first place now a

lot of people don't even know where to

source the data what kind of qualitative

quantitative data

has to be sourced for a particular

company with sources it needs to be

taken a look at the company filings the

investor presentations conclude

transcripts and likewise other sources

and the second reason why people

struggle is what they would have studied

as majorly from global perspective but

they have never really actually applied

it to an indian accounting standards

perspective

and openly listed indian companies

annual reports during their graduation

or any other training

precisely with that intent to enable a

fresher who is

willing to and very much passionate of

building a career

in investment domain this skill set is

very much needed and with that intent we

have launched this financial statement

analysis series we strongly believe

that financial statement analysis series

is

a three-step process first

analyst needs to learn how to extract

data

second

understand the extracted data first and

then third

use that data and analyze it connecting

it to the business precisely these three

steps will make you a very good decent

analyst at least to begin your career

with in the investment domain

in the series of financial statement

analysis upcoming episodes what we plan

to give out is a live listed indian

company's case study training

perspective like when you learn a

concept learn how to apply it to a

listed indian company

proceed with these three steps

extracting understanding and analyzing

the data

and then connect it to the business

we want to give out a practical training

perspective to each and every candidate

who's listening to this video

based on our experiences after having

worked in the investment domain for over

a decade what we have done is we have

collated this wonderful content from our

own learnings from our own struggles and

we have tried to collate this content

and pin it down for you this video

series will walk you through with

understanding and extracting data of

each and every line item on all the

financial statements which is where you

genuinely understand what financial

statement analysis means all right so

hope that that intent let's get started

with the first pilot episode of our

series hopefully you guys like it by the

way

you can follow us on our instagram

handle you know facebook as well as

youtube to gather more such content as

well as you can refer to our website

financialshowclasses.com on the forum

section you'll find some really decent

written material which i'm referring to

on the screen right now all right so

let's get started with the first line

item which is revenue as you may already

know it by the names of turnover total

sales or as a matter of fact even

sometimes referred to as total income

now

why is it so important that we should

focus on revenue because revenue is only

the single way for a business to

generate cash to fuel its operations or

even

grow

in future at a sustainable rate

a business is usually valued based on

the amount of earning potential it has

now these earnings are directly driven

by revenue so which is why revenue

drives valuations and hence it's really

important

for every analyst to understand

revenue now often a lot of

uh you know a prominent indicator of a

growing business which is taken one of

the prominent indicators which is taken

is revenue growth rate when you take a

look at a growing business you often

take a look at

what kind of auto add water rate revenue

is growing so before we get to the final

outcomes let's first understand remember

the three steps of financial statement

analysis the first step is extracting

the data so let me first explain how do

you extract revenue data from financial

statements now when it comes to uh

you know financial statements let me

just quickly take one simple case study

at point here and walk you through now

you know the case study which i have

taken is hindustan unilever limited i'm

sure all of you may have heard of it

business now you can extract revenue

data from set of financial statements

now in you know annual reports you will

find generally two kinds of two sets of

financial statements

one would be standalone and second would

be consolidated now as you can see let

me just quickly you know browse you

through so that you get a fair

understanding this is annual report 2021

by the way of hindustan union level

limited on page number 65 you will see

uh standalone financial statements of

hindustani universe limited this is

standalone balance sheet

as you can see assets liabilities and

equities followed by standalone bnl

statement which is statement of profit

and loss or also known as statement of

operations or income statement

followed by statement of changes of

equity as well as a cash flow statement

now similar

set of financial figures

are available for consolidated as well

which is there on page number 104 now

you may wonder what exactly is the

difference between standalone and

consolidated something which we will be

covering in the next video series but

for now

let's take by default all the figures

from consolidated

both financial statements of standalone

consolidated are used for analysis

perspective but like i said hold on to

that for now because we will be first

understanding what's the difference

between both of them

afterwards but for now as a default

let's just refer to only consolidated

because when you take a look at the

consolidated statements you will you

will be able to extract revenue figures

from income statement when you take a

look at income statement let me zoom in

a bit so that viewers of this video can

benefit and can actually read the

content on the screen as you can see the

income statement is usually

presented in this fashion starting with

revenue now when you see this this would

be the revenue figures the numbers are

obviously in pros as mentioned here you

will see the latest year here and the

comparable year here

when you take a look at this you will

see it to be of two parts one is revenue

from operations and second one is other

revenue now you may wonder what the

company means by revenue from operations

and what exactly falls under revenue

from operations uh that would be in note

24 this is the most important part of

financial statement analysis had there

been no nodes

financial statement analysis wouldn't

have been possible so which is where

it's really important for analysts to

learn how to read these footnotes now

these are often known as notes or

footnotes for any annual

you know or rather quarterly financial

statements now when it comes to

these footnotes they are usually

provided in india on annual basis you

for you to understand what falls under

revenue from operations you need to take

a look at footnote number 24 and 25. for

your reference so that you know the

reconciliation of figures makes sense

i'm just going to write it down here 47

0 to 8 is revenue from operations so i'm

just going to write it as rob and then

there is other income of

nearly 410 crores so yeah pardon me for

the handwriting and trying to do

a decent job at it all right now you

know we need to open these footnotes now

where are these footnotes available if

you scroll down below the financial

statements the footnotes data is useful

and for that we need to take a look at

the footnote numbers which are mentioned

here so note number 24 and 25 are

actually available on page number 121

of hindustan universe limited i've taken

down those numbers so that you know i

use your time on this

video very efficiently by the way you

can apply these things on your own as

well now let me just quickly scroll down

yeah you can see note number 24 here

revenue from operation now remember the

number which we sourced from income

statement was 47028 and you can see this

total to be matching to that number

and these are sub items rolling up to

that four seven zero to eight crore

figures now let's understand what these

items are sorry

uh yeah let's understand what these

items are one by one sale of products

sale of services as you can see in this

annually limited

is selling products and how much revenue

it's generating from them and services

then there's something which is known as

other operating revenue with the

condition supply now you can see this

conditions apply to be mentioned here

um you know

we'll take a look at that as well but

other operating revenue falls around you

know three buckets now

these natures are income from services

rendered makes sense uh what exactly is

operating revenue one might wonder

operating revenue is basically revenue

generated from core business activities

like industrial unlimited as into

manufacturing of a lot of products and

selling it out there under different

brands now that is their core operating

figure when you take a look at uh other

operating revenues you will also find

commission income on consignment sales

moreover you will find government grants

scrap sales and export now you may

wonder

why

government grant is actually operating

revenue shouldn't it be a non-operating

thing because government grant is

something which is given off by

government sometimes maybe one off or as

a matter of fact on a recurring activity

as well if you're generating it it's not

something which business is actually

doing an activity however the reason why

often government grants or export

incentives or even sales tax incentives

are classified as operating revenue is

because

government is incentivizing these

businesses because of their operations

what kind of domain they are operating

in is precisely why they are receiving

those subsidies so any kind of grants or

incentives or subsidies provided by

government to the businesses are mainly

because of their core business

operations hence that is actually

included in revenue from operations now

precisely what you see here is a total

of 470 to 8. now you may wonder

how did this number come

how is it that we got this figure 470 0

to it now to understand how a revenue is

computed

you can take a look at the accounting

policies of

financial statements remember accounting

policies are present just below the

financial statement so when we saw the

consolidated figures on page number 104

let me just quickly walk you through

on page number

104 when we saw the consolidated figures

when you scroll down let me zoom out a

bit so that scrolling is easier when you

scroll down just below the financial

statements you will see accounting

policies now these are basically

accounting policies explaining what they

have done and why they have done and how

is it that they have calculated each and

every so what particular line item on

financial statement represents and how

is it calculated is present here in

accounting policies section now when you

refer to page number let's say 71 which

is again similar accounting policies

which are present for standalone you

will see revenue recognition paragraph

which is same for standalone and

consolidated in this case of windows 10

unity level limited which is why i went

to standalone now when you see

you will see a paragraph here let me

actually zoom in a bit so that it's

you know

readable for users when you see this you

will see revenue is actually calculated

based on contracted price after

deduction of any trade discounts volume

rebates any taxes or duties collected on

behalf of government such as gst

let me explain the statement believe me

this is genuinely very important

revenue figures so imagine like that

let's say if hul is selling a soap at

100 rupees mrp and i don't know maybe

there is let's say uh five percent gst

applicable to that um you know

in this mrp of 100 rupees they have

collected a five rupees gst which by the

way is not their revenue because they

have to

they are basically a collection agent on

behalf of government that's the beauty

of indirect taxes so you know different

companies are collecting taxes on behalf

of government and then eventually filing

it to the government paying it back to

the government so when hul is actually

charging you hundred they may be getting

hundred rupees cash but out of that

hundred they have to pay five rupees to

the government assuming let's say five

rupees was the gst so 100 is revenue mrp

this is basically the contracted price

five rupees would be gst and let's say

if there is a customer who comes you

know on a regular basis and maybe you

would want to you know offer a lucrative

price and he or she asks for a discount

that would be the great discount volume

rebates are basically if you know often

people tend to buy in huge volumes and

to incentivize them to keep on a

recurring basis buying from the company

the company may choose to offer certain

discounts that would be volume discounts

or volume rebates so let's say if there

was a two rupees volume rebate so

technically speaking the revenue which

is reported

on the income statement the 4702 wait

figure which we saw

is corresponding to this 93 figure so

this is what is reported on

income statement as a revenue under new

accounting standards now

you need to verify how a business is

computing revenue by taking a look at

the accounting policies this revenue

recognition will study more on what this

is in the upcoming series but for now

you only need to refer to this paragraph

to understand how a revenue is actually

calculated now let me move back to the

you know the footnote of revenues on

page number 121. there's one more thing

which i want to talk about now when we

refer to the revenue from operations the

rop figure which was 470 to 8 precisely

the same breakup is available just below

that footnote now this is a mandatory

footnote under new accounting standards

for each and every business to provide

the aggregation or the breakup or

reconciliation of contracted price with

the reported revenue so let's say this

was precisely the mrp figures and the

deducted amount would be either gst

collected on behalf of government

and

either trade discounts or volume

discounts etc and then comes your sale

of products so what you see here for six

three two one now you may wonder why is

it not matching with force and zero to

it let me explain remember this 463 to 1

is for goods and services it's not other

operating revenue which you see here so

if you add these two together you will

get this number

and these would be the other operating

figures which are added so for every

analyst to understand how do you

calculate total revenue from operations

a total revenue from operations is

actually calculated as you know uh

operating revenue

which is

sale of products and services

plus other operating revenue which would

be this section so please understand in

terms of revenue figures it can be

broken down into three aspects one is

operating revenue second is other

operating revenue and then would be

other income

so remember the difference is these two

are operating in nature the other income

is non-operating in nature now you may

ask this question or you may actually

face this query what exactly is other

operating income and what you know what

was the figure now let me just quickly

you know toggle back to the income

statement which we saw and we will take

a look at the other income figure i had

written it down but because i had to

clear the screen let me just quickly

toggle it back so 105 page number was

income statement so you see this other

income footnote of 25

which is of 410 figures foreign let's

just quickly browse back to that

footnote 25 once again present on page

number 121.

now when you open this 121 you will see

on the right hand side let me just

scroll right you will see note number 25

other income and this other income just

observe the nature of line items

so interest income

why is interest income considered other

income now a lot of businesses may have

excess cash at their hands and they may

be parking their money with liquid

mutual funds or some other schemes or

investment opportunities where they feel

however since it's not really a banking

firm or nbfc operating in a banking

sector you know the income which they

are generating is technically a

non-cooperating income hence it's often

clubbed under other income which is

termed as other non-operating income as

well so as you can see bank deposits

current investments and others are

basically these are interest income

which the business may have generated

more or there could also be dividend

income because let's say if you have

invested in shares of other companies

and you actually receive dividends that

is also non-operating in nature unless

you are let's say a holding company like

berkshire hathaway then perhaps

investing makes sense that would be your

core operations but in case of hul this

becomes a non-core operating activity

hence dividend income is a non-core

operating or a non-operating income

moreover there are other non-operating

incomes as well here which is fair value

gain on investments now you may not

understand this as of now but we will be

covering this line item in our next

video series so stay tuned for that or

you will also see sale of investments

remember these are investments and not

you know technically speaking scrap

sales so which is why you know

investments are considered non-operating

in nature now let me just quickly cover

why scrap sales are actually considered

operating in nature a business often

tends to recycle their assets you know a

new asset is coming and every time you

sell the old assets it's part of the

core operations only because you tend to

recycle your assets for the operating

activities which is why scrap sales are

often considered operating income now

you may think this is is this usually

the presentation for all

businesses you know is this how actually

all businesses

see the presentation to be so let me

just quickly browse back to 105 which

was income statement so this was a

presentation for most of the businesses

however the presentation can vary across

business to business so let's say if i

open icici annual report income

statement which you have in front of

your screen by the way you will see

the presentation of income statement has

changed so depending on industry to

industry the presentation may change so

interest income as you can see this is a

banking industry so

your precise core activities are lending

so the interest which you generate are

operating income

in nature so which is why interest

earned is basically revenue from

operations so what you see here is you

know connecting how business

works and the figures are accordingly

tied back to them so this is precisely

in terms of understanding how the

presentation of income statement is done

there are a couple more points here let

me just quickly sum it up now in terms

of um you know non-operating items often

you may see sorry in terms of

non-operating item you may often see uh

line items like uh

you know

interest income dividend income

something which we have seen in terms of

operating income sorry you may see a

line item called claims received now

often businesses tend to ensure their

ongoing operations so if something goes

wrong they may receive that claim back

which is why it's actually known as

operating income because it's an ongoing

activity for the business as part of the

core operations um

in terms of uh financial statements

please be very careful in what line

items you see in operating income and

non-operating income so the presentation

which you see here an analyst should go

and verify in footnotes

whether those line items are generally

operational in nature and not precisely

brings us to the point should we

consider

what line items the business has

mentioned to be directly operating in

nature no and why is that we'll take a

couple of case studies in the next video

so stay tuned if you like this video

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bye