Estimating "Value Added" from a "real life" Profit and Loss Statement

OK! So this is the post I’ve wanted to do for the past 12 days...i.e. ever since I inaugurated NerdVerve. 

In human time, that’s just 12 days. In nerd time, it’s like 12 years. 

So let’s get to it. 

Today, I will use a "real life" Profit and Loss Statement (Dabur India Limited’s FY15 statement - see Table 1) to calculate “Value added”. I use the words "real life" liberally in this sentence. It's called "nerd-etic" license. Yes, I made that up. 

Table 1: Dabur India Limited's FY15 Profit and Loss Statement

To estimate Intermediate Consumption, I’ll need to demystify the “Other Expenses” line item in the P/L (Profit and Loss) Statement above. Provided below is the break-up for “Other Expenses”.

Table 2: Break-up of "Other Expenses" line item in Dabur's P/L Statement

 We’ll also need data on the change in inventories. *Recites spell.

“Hokus pokus snippety dippety drump

Haloola paloola vanish Donald Trump”

*Data on change in inventories magically appears. 

Table 3: Change in Inventories of Finished Goods, WIP and Stock-in-trade

Finally, since we’ll also need Cost of Goods Sold (COGS) for this exercise, provided below is the P/L statement for Dabur presented in a slightly different format. This is the format that equity analysts use when they analyse company financials.

Table 4: Profit and Loss Statement for Dabur in a different format (breaks out COGS)

Perfect. Now, I’m going to post my excel worksheets where I estimate “Valued added” by Dabur india limited in FY15 from all the information provided above. The derivation process on the worksheets is methodical and accompanied by notes, which should make them self-explanatory if you’ve read my previous posts. Even if you havn’t, because I’m Awesim (Awesome + Simran), I’m going to discuss the key elements of the process  anyway. 

Bottom-line: you will not leave this page without understanding what I’ve done here. I won’t allow it.

Worksheet 1: Finding Gross Output 


Important Points: 

1. Basic Prices

Those of you who’ve read my post, Treatment of Inventories in National Income Accounting, will remember that per the SNA, Output should be estimated at Basic Prices. Basic Price = price received by producer - any product taxes (VAT, Sales tax, Excise duties etc.) + any product subsidies. The sales figures for Dabur are provided at Basic prices in the P/L. That said, strangely, in the “Other Expenses” break-up, I found two items: Sales tax (Rs. 11.5 Crore) and Commission, discount and rebate (Rs. 37.6 Crore). Even though per the notes to the P/L statement (in the Dabur annual report), these items should have been excluded from sales, they were not from some reason and included in “other expenses” instead. So, I’ve subtracted them from “Revenue from Operations” in order to get “Total Revenue” for our purpose. 

2. Other Income

I’ve also not included “Other Income” in Total Revenue (unlike in the Dabur P/L). While technically, Other Income which includes items like rent income & interest income, should be part of the output of the receiving enterprise, doing so in National Income accounting  can lead to double counting. This is because when we use the Production or “Value added” approach for measuring GDP, the interest and rent income received by Dabur is already counted as part of the value added by other enterprises (those that are paying out the rent and interest). Just like the interest and rent paid out by Dabur is part of it’s own Value added. In such a scenario, if we include Dabur’s rent and interest income in it’s output (and hence in its value added), we’ll be double counting. Also note that Other Income includes gain/losses on the sale of investments and fixed assets, which are not included in GDP/National Income.

3. Changes in Finished Goods (FG) and Work-in-Progress (WIP) Inventories 

Output = Sales revenue + Change in FG inventories + Change in WIP inventories. The changes in FG and WIP inventories (in FY15) provided in the Dabur annual report are at “Cost”. For the correct estimation of output, we need to estimate the change in FG and WIP inventories at Basic prices (per the SNA). 

i) How do we estimate the change in FG inventory at Basic prices? 

First, we need to find the COGS % (i.e. COGS/Sales) or the Gross Margin (%) for Dabur. Note: GM (%) = 1 - COGS/Sales. You can see from Table 4 (look at the stand-alone figure for 2014-15) that COGS = Rs. 2,826.1 Crore. For Sales, we’ll use the "Total Revenue" figure from my worksheet (Rs. 5,382.1 Crore), which is at Basic prices. COGS/Total Revenue = 52.5%. 

Now, the change in FG inventory (Rs. 40.7 Crore) is recorded at cost in Dabur’s financial statements. This means that the cost of each unit of FG inventory = COGS/unit. This further means, that to write up the value of change in FG inventory to Basic prices, we should divide the change in inventory by the COGS % (COGS/Sales) ---> 40.7/52.5% = Rs. 77.4 Crore. Voila! Rs. 77.4 Crore is thus the value of change in FG inventory at Basic prices. 

ii) How do we estimate the change in WIP inventory at Basic prices? 

The value of change in WIP inventory at cost is (-) Rs. 11.3 crore. The value of this WIP inventory at Basic prices = -11.3 /52.5% = (-) Rs. 21.5 Crore. 

4. Gross Output

Output = Total Revenue (at Basic prices) + Change in FG inventories (at Basic price) + Change in WIP inventories (at Basic prices). I’ve called this Gross Output because we havn’t excluded depreciation from this Output number. 

Worksheet 2: Finding Intermediate Consumption 

Important Points: 

1. Formula for Intermediate Consumption 

Read my previous post, What is Intermediate Consumption? And how is it different from COGS?, to understand what Intermediate Consumption means. The formula for estimating Intermediate Consumption (specific to this example given the information provided) is:

Intermediate Consumption = Cost of materials consumed + cost of Stock-in-Trade consumed + cost of Stores/spares consumed + Other bought-in goods and services. 

2. Cost of Materials Consumed

Many a times, a P/L statement gives us the cost of “Purchases” of materials. The value of “materials consumed” (for producing Output) is then derived like this: Materials consumed = Material purchases - (Ending Inventory of material - Beginning Inventory of materials). Since in Dabur’s P/L, we’re already given the value of materials consumed, we can use it directly and don’t need to perform any calculation.

3. Cost of Stock-in-Trade (SIT) Consumed

Purchases of SIT inventory (provided in P/L) = Rs. 937.3; Change in SIT inventory = Rs. 2.9 Crore (also in P/L). Hence, Cost of SIT consumed = 937.3 - 2.9 = Rs. 934.4 Crore. 

4. Cost of Stores and spares Consumed

I’ve pulled this figure out of the “Other Expenses” head. 

5. We won’t subtract changes in FG and WIP inventory

You’ll notice in Dabur’s P/L statement that the changes FG and WIP inventories have been subtracted from the Expenses head to get “Total Expenses”. The reason this has been done is because P/L statements list expenses related to the Sales made during the period. Hence from total expenses, the cost of changes in FG and WIP inventory needs to subtracted since these costs cannot be attributed to sales. We on the other hand, are estimating costs for “Gross Output” produced, which includes changes in FG and WIP inventories. Hence, we don’t need to subtract the cost of changes in FG and WIP inventories when we calculate Intermediate Consumption. 

6. Other bought-in goods and services 

Here I’ve listed all the other goods and services purchased by Dabur from outsiders e.g. power and fuel, repairs to building, plant & machinery (I’m assuming here that this includes tools/goods and services purchased from outsiders. Supposing this head includes the salaries for a repairs technician employed by Dabur, then this would have to be excluded from intermediate consumption. However, in the absence of this level of detail, assuming that repairs included goods/services bought from outsiders is a good assumption), processing charges, insurance, freight and forwarding charges, advertising and publicity, travel charges, legal and professional fees, security expenses etc.

Worksheet 3: Finding Value Added

Finally, Valued Added by Dabur India Limited in FY15 = Rs. 1,628.3 Crore. 

Booyah!! 

Who’s the nerd?

I am. * Hi-fives self.