How to Read a Balance Sheet: HUL

In the last blog, we took the first few steps in learning how to read a balance sheet. Here’s a recap of what we did last time. We asked the following four questions:

  1. How much money have the owners put in my company?
  2. Where was the money put?
  3. Can I recreate the same assets using the original money?
  4. Where do I find all this information?

Today, let us use HUL as a practical example to see how to take the process ahead.

5. Kabhi Gadhe ke Upar Naav, Kabhi Naav ke Upar Gadha. Ask, “Do shareholders always have to put their own money to run a business?”

Clue: Click on the picture to enlarge it. Look at the red box. Those numbers are called working capital.

Current assets are required to run the everyday business. It includes readily available cash, raw materials, credit given to buyers and so on.

Some of this is financed by current liabilities, such as the credit received from suppliers. Usually, however, current liabilities fall short. And the shortfall must be coughed up by the owners.

This shortfall, by the way, is called working capital. When the working capital is a positive number, it means owners have to provide it.

Here’s the amazing thing: HUL’s balance sheet shows huge negative working capital!


And why has the amount gone up by six times in the last ten years?

Is it a good thing for you as a value investor?

Reading balance sheets is fun.

Until next time then,
Happy Value Investing!

(Disclosure: I DO hold a position in HUL shares at the time of writing this post. Please also read the terms of use.)

Flickr Creative Commons Image via El Bibliomata

5 thoughts on “How to Read a Balance Sheet: HUL”

  1. But, wouldn’t that even signify that the short term liquidity of the company is bad, because its current assets are lesser than its current liabilities ?

    1. Hi Mohnish,


      Yes, that’s the usual lesson we are taught in ratio analysis. Unfortunately, that’s only half the truth.

      It really depends on your relative strength vis-a-vis your creditors.

      Case 1: Aam Junta

      If your creditors are strong and can turn off your supplies, then you better have sufficient current assets (preferably liquid assets) to service them. This is the case with most businesses. In fact, if you and I were to start a venture, that’s the situation we’d face 🙂 In such cases, current assets must be greater than current liabilities. It follows that the current ratio will be greater than one and working capital will be a positive number.

      Case 2: Superstars

      If you are a major FMCG player like HUL and your creditors can’t turn off your supplies for the fear of losing business, then you needn’t have current assets to pay your current liabilities. Your creditors will extend you credit. It follows that the current ratio will be less than one and working capital will be a negative number.

      Here’s the kicker though: for superstars like HUL, the creditors are acting as a source of finance!! In fact, they are boosting the company’s growth. Note how its negative working capital has grown over the years.

      We’ll see in the next blog in the series, how it corresponds to HUL’s booming sales.

  2. You have calculated negative WC by using Net Assets/Total Liabilities..have you used Net operating Assets in the numerator??

    If we use the difference between the receivable days and the payable days, and then compare it with the inventory turn, wud we get the same result??

    Also, I have noticed that HUL has hardly invested anything in fixed assets since more thing: are the investment figures indicate the cash/bank securities being held by the company??

    Btw, it’s a great initiative that is helping many like me in picking up the small nuances of value investing..also, thanks for the suggestion of Stephen Pennman book, it’s a bit dense but I am sure I wud start liking it soon 🙂

  3. Hi Manish,


    Not at all. Working capital is calculated here (as it should be) using assets and liabilities other than the long duration ones. Long duration assets appear on the assets side (shown in the image). Specifically, they are – fixed assets and investments. Long duration sources of funds appear on the liabilities side (not shown in the image).

    Yes, calculating days for each component of working capital would intuitively point in the same direction. For example, one would expect HUL’s receivable days to be shorter than its payable days.

    Investments that you see in the image, are long duration ones. They are typically the shares in other companies. For HUL, it’s the shares of its own subsidiaries (it has lots of them). If a company holds a portfolio of mutual funds and shares, you’ll also find it here listed under the heading of investments.

    Cash and bank balance are held for short duration and form part of current assets (and subsumed under working capital, of course).

    A good way to find these specifics is to refer to the respective schedules that appear after a Balance Sheet.

    As for fixed assets – you’ve anticipated the topic of my next blog post 🙂

    Keep reading Penman. Graham, Penman – they’re the advanced side of value investing and totally worth it.

    Happy Value Investing!

  4. Thanks for the clarifications. It was helpful indeed.

    Yes, actually, I am reading Penman and Graham these days (the first edition of security analysis). Just trying to get a good grasp over the financials…will look forward to your next post.

    Thanks again.

    Happy Value Investing! (although, this is a tough market for value investors ;))

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