Financial Statement Analysis

Question 1

Groups of Stakeholders

Answer 1

1) External stakeholders
- Stakeholders with contract income (focus on financial stability) : creditors, suppliers, employees
- Stakeholders with residual income (focus on profitability) : shareholders, stock options eligibles

2) Internal stakeholders (decision-making and behavioral control) : management boards, supervisory boards, advisory boards

Question 2

Types of key figures

Answer 2

1) Absolute Key Figures : used for size classification and trend analysis -> their significance is small without suitable benchmarks (net profit, revenues)
2) Relative Key Figures (ratios) : two absolute figures are compared to each other
- Breakdown : comparison of partial to total sizes
- Relationship : ratio of different types of aggregates
- Index : represent temporal changes in a size
- Other metrics : ratio of equally ordered sizes which differ by one characteristic

Question 3

Types of analysis

Answer 3

1) Analysis of net assets : information on the development of the asset structure, asset turnover and business growth
2) Analysis of financial position and liquidity : shows the current/future solvency of a company
3) Analysis of results of operations : shows the company specific earning potential (return on equity and the total return on capital)
4) Analysis of capital structure : information on forms of financing and financing risks

Question 4

Performance-based analysis (profitability)

Answer 4

• Key question : what is the future profitability ?
• We can calculate retained earnings (whatever the fuck we have left at the end) through these steps :
  1) Total revenues (sales)
  2) Gross Profit (revenues - cost of goods sold)
  3) EBITDA (earnings before interest, tax, depreciation and amortisation)
  4) EBIT (operating profit = EBITDA - DA)
  5) EBT (operating profit - interest to creditors)
  6) EAT (earnings after tax = net income)

Question 5

Structure of the Income Statement

Answer 5

1) Total Cost Method : includes all costs incurred during the period, whether they relate to sold goods/services or not
- Highlights the operating performance by accounting for all costs incurred during the reporting period
2) Cost of Sales Method : focuses only on costs related to sold goods/services
- Focuses on matching revenues with the costs of producing sold goods
- Allows for Gross Profit Recognition

Question 6

Liquidity Analysis Ratios

Answer 6

1) Static Liquidity Analysis :
- Cash Ratio = Cash / Current liabilities
- Quick Ratio = (Current assets - Inventories) / Current liabilities (ideal ≥ 100%, to pay off debts)
- Current ratio = Current assets / Current liabilities (if < 100%, regarded as threat to company’s existence)
2) Dynamic Liquidity Analysis :
- Free Cash Flow = Operating Cash Flow - Investment Cash Flow
- Net change in cash = Operating + Financing + Investing Cash Flows
- Net change in working capital = Operating Cash Flow - Gross Cash Flow

Question 7

Balance Sheet Ratios

Answer 7

1) Asset Structure Ratios:
- Fixed Asset Intensity = Fixed Assets / Total Assets
- Current Asset Intensity = Current Assets / Total Assets (capital locked up in current assets)
- Asset Structure = Non-current assets / current assets (show stability + flexibility)
2) Capital Structure Ratios:
- Equity Ratio = Equity / Total Capital (more’s better)
- Debt Ratio = Total Liabilities*Debt / Total Capital
- Debt Gearing Ratio = Total Liabilities / Equity (high ratio = higher dependence on external creditors)

Question 8

Profitability Ratios

Answer 8

• Gross Profit Margin = Gross Profit / Revenues (indicates the efficiency of core operation)
• EBIT Margin = EBIT / Revenues (higher margin = stronger impact of a change in sales on earnings)
• Profit Margin = Net Profit / Revenues (reflects overall profitability)

Question 9

Golden Rules (ratios)

Answer 9

• Golden balance sheet rule (Investment coverage) = Fixed assets / Total equity OR Total assets/Total capital ≤1 (the assets tied in to the company for the long-term are covered by long- term capital)
• Golden financing rule (Principle of matching maturities) = Current liabilities / Current assets ≤1 (the terms between obtaining and repaying capital on the one hand and the use of capital on the other should be in line with each other)

Question 10

Return Ratios

Answer 10

1) For shareholders : Return on Equity
- RoE = Net profit / Equity (measures how much income is earned for the shareholders on their invested capital)
2) For investors : Return on Investment
- RoI = EBIT / Total Capital (interest on the total capital used)
3) For me : RoS = Net Profit / Revenues = RoE / ET
- ET = Revenues / Equity
- CT = Revenues / Capital