Poor works for money, while money works for rich.Book – Rich Dad Poor Dad
Financial accounts have three parts – Balance Sheet, Profit and Loss and Cash flow. As Rich Dad, from Book Rich Dad Poor Dad, have taught its reader that poor works for money, while money works for rich. If we try to put this learning in financial accounts that Poor continues to work on its Profit and Loss statement and ignore the balance sheet. Gradually, poor accumulate liabilities (Car Loan, House Loan) on its balance sheet and later pays price for same. On other hand, Rich people work effectively on Balance sheet by accumulating assets like Bonds, Shares etc. These assets pay dividend for rich. Rich dad also explains in detail about cash flow impacts of assets and liability. For instance, Car Loan need to be repaid along with interest irrespective of usage of Car. Thus, Car loan has negative cash flow for owner. On other hand, Bondholder will receive the interest (coupon). This post will try to understand impact of Covid-19 on Financial statements and steps taken by RBI and Government to ease the concerns.
In the current lockdown imposed by the Government to curb the increase of coronavirus cases India, economic activity has come to a near stand still except for health care and essential items. This lockdown should result in nearly zero operating income for company, negative cash flow, losses owing to fixed costs and erosion of equity in balance sheet. Moreover, few companies will find it difficult to service debt and fixed costs. At last, as financial markets are forward looking our equity has already tumbled 35% from top 12400 to 8250 ☹.
To understand this in better detail – let’s take an example of Priya Village Roadshow (PVR) limited. Before recent crash, PVR limited has gained more than 40% in just one year. PVR was riding high strong movie collection and food sales from movie outlets. Fast forward to Covid-19 governments has announced closure of movie halls to reduce spread of virus. This should result in negative cash flow, losses and erosion of equity. Share price of PVR has corrected more than 50% from 2150 to 1050. The extent of damage can be ascertained from liquidity and debt ratio of company. PVR has a current ratio of just 0.4 i.e. current assets are just 40% of current liability. Company has interest obligation of average INR 120 Cr in last three quarters as debt ratio stand at 0.9. At last, this is essentially a cash flow problem for the company as once we struggle our way through Covid-19, company is likely to recover stronger on the other side.
Understanding such cash flow crunch effects, RBI has eased NPA rules and announced Moratorium on banking loans. Borrower can delay EMI by 3 months, without attracting penal charges. But interest will continue to accrue during this period. On similar line, Government likely to increased 80 C investment period upto June-20, thus providing 90 days for individuals to invest in tax saving instruments. Although, individual likely to save upto 30% (46,500 along with cess on saving of 1.5 lacs) depending upon their tax brackets, there is fair possibility that majority might not use that option. As discussed earlier, in these times cash has become the king and individual likely to prefer tax in hand over tax saving.
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