Five lines below the headline

A midcap's Q4 press release landed in a group chat I am on yesterday evening. Profit up 25 pct. By the time the chat finished congratulating itself, the stock had gapped up.

I did the boring thing. Opened the actual results filing and read five lines below the headline.

Line one, other income: a Rs 40 cr gain on a land sale. Happens once. Line two, the tax line: a Rs 25 cr deferred tax write-back, effective rate down from 25 to 19 pct. Line three, depreciation: useful life of the plant stretched from 10 to 15 years, which quietly added Rs 20 cr to profit without a single extra unit sold.

Strip those three. The headline Rs 500 cr becomes Rs 415 cr against last year's Rs 400 cr. The 25 pct growth is 3.8 pct.

Lines four and five test what is left. Receivable days went from 54 to 78, so a chunk of the quarter's sales are still promises. Cash from operations came in at Rs 290 cr against Rs 500 cr of reported profit. Conversion of 0.58. Even the 3.8 was booked faster than it was collected.

(The company here is illustrative. The five lines are not. They sit in every results filing in the same places.)

Three rules from my desk. The headline is chosen and the notes are mandatory, so read the filing, not the quote. A line that cannot repeat is not growth, strip it before you compare years. Receivable days crack before earnings do. Days first, conversion second, headline last.

A press release is written to be quoted. A filing is written to be checked. Quote nothing you have not checked.

Two documents, same evening

Every listed company files its results with NSE and BSE under the SEBI listing rules. The press release is optional and written by the company. The filing is the statement of profit and loss with its notes, in a format the rules fix. The same quarter, two very different reads.

Lines one to three: strip what cannot repeat

Do the arithmetic once and it sticks. Reported profit Rs 500 crore. Take out the Rs 40 crore land sale, because the company cannot sell the same land next year. Take out the Rs 25 crore tax write back, because the tax rate will not keep falling by 6 points. Take out the Rs 20 crore that came from the change in useful life, because it is an accounting choice, not a better business. Rs 500 crore less Rs 85 crore is Rs 415 crore. Against Rs 400 crore last year, growth is Rs 15 crore, or 3.75 percent, which the opening rounds to 3.8.

Line three is the quiet one, so here is where the Rs 20 crore comes from. Say the plant cost Rs 600 crore. Spread over 10 years, depreciation is Rs 60 crore a year. Spread over 15 years, it is Rs 40 crore. Nothing about the plant changed on the day of the decision. The cost just moved into later years. Ind AS allows a company to revise a useful life when its estimate changes, and the change has to be disclosed, which is why it sits in the notes and never in the press release.

Lines four and five: test what is left

Receivable days is trade receivables divided by sales, times the days in the period. It tells you how long customers take to pay. Run it on a business with Rs 4,000 crore of yearly sales. At 54 days, receivables are about Rs 592 crore. At 78 days, about Rs 855 crore. The extra 24 days means roughly Rs 263 crore of sales the company has booked and not collected.

That is why line five agrees with line four. Cash from operations of Rs 290 crore on Rs 500 crore of profit is a conversion of 0.58. Even against the cleaned Rs 415 crore, it is only 0.70. The money that did not arrive is sitting in those 24 extra days. The post on cash against profit walks the bridge from profit to cash one line at a time.

Where each line sits in the filing

Other income is its own line near the top of the statement of profit and loss; a large jump usually has a footnote. The tax line shows current and deferred tax separately. A change in useful life is disclosed in the notes on accounting estimates. Receivables are on the balance sheet, and cash from operations is in the cash flow statement, both filed with the half year and full year results. Five places, about ten minutes.

The free Learn module on revenue quality and earnings quality puts these checks in order with the auditor's notes as a sixth stop, and ends with a quiz. The companion post on other income takes line one apart on its own.