Financial Analysis ISC 2022

Financial Analysis
1
Financial analysis for whom and for what?
• Resources providers (e.g., lenders,

shareholders, employees)
• Recipients of goods and services (customers,
debtors)
• internal management to help them in their
decision-making capacity
• To a lesser extent, regulatory authorities (e.g.,
tax office, regulatory authority, statistical office)
2
Financial analysis :
Why do it concretely?
Determine risks (solvency)

Analyze profitability
Enhancing the value of the activity
 Understanding the evolution of the Company
Recommend corrective measures
3
How do you do it?
Studying the Financial Balance Sheet to analyze

the risk
Studying the income statement to analyze

profitability
4
Watch out! Two types of presentations
• Under IFRS (International Financial Reporting

Standards)/IAS (international accounting standards) for
consolidated accounts and listed coJempanies.
• According to the national accounting plan GAAP( US,
French ...)for smaller and unlisted comanies
5
Financial analysis
I The Balance Sheet
Basic principles:
 Assets are what the company owns (its uses...)
 Liabilities represent its financing (its resources...)
 Sum of the assets = Sum of the liabilities (the Balance of the accounting balance ...)
 Assets and liabilities are presented by increasing availability (French chart of

accounts) or decreasing availability (Anglo-Saxon standards)...
6
I The Balance Sheet
Let's start by starting a business:
The capital is paid into a bank account opened for this purpose,
with the balance sheet after
The company buy some real estate for 12,000 by borrowing 10,000 from the bank.
As a result of this operation, the balance sheet evolves as follows:
And so on and so forth... 7

I The Balance Sheet
What assets can the company hold?
ASSETS
• Goodwill
Long
• Real Estate
• Machines term
Net fixed assets • Patents / Trademarks assets
• Financial investments
• Inventories
Operating assets • Trade receivables
• Other receivables Short
term
assets
Liquidity • Availability
• Investments
8
From gross fixed assets to net fixed assets:
The basic principle
Every business needs equipment to function.
But the tools used wear out more or less quickly depending on their nature
and use. They must therefore be periodically replaced by new equipment.
This necessity is recognized on the fiscal level.
As a result, each year companies are allowed to deduct from their operating
income an amount set aside (and not taxed...) in order to provide for the
replacement of their production tool.
These amounts are calculated according to the principles set out in the
General Chart of Accounts. They are calculated tool by tool according to the
destination and the assumed useful life of each tool.
This is referred to as depreciation and amortization.
From gross fixed assets to net fixed assets:
What happens if the property is resold?

In fact two possible cases
• Sale after the end of the depreciation period: the amount received constitutes an exceptional capital gain since the
asset, fully depreciated, no longer had a book value.
• Sale during the amortization period: the amortization ends on the day of the sale, so there remains a book value, so
you make a gain or loss on the sale.
NOTE
Depreciation, amortization and gains and losses are charged to the income statement....
I The Balance Sheet
What are the company's liability items?
LIABILITIES
Shareholders' equity • Capital stock

Long
• Earnings from the past years
term
Long-term debt • Bank loans liabilities
• Bond issues
Operating liabilities • Trade payable
• Tax and social security Short
term
Cash credit
• Bank overdraft liabilities
11
I The Balance
Sheet
the key elements: Assets
GROSS corresponds to the acquisition value of the assets.
originally
Gross Amortization and Depreciation Net
FIXED ASSETS
Intangible assets 2 770 1 420 1 350

Property, plant and
113 170 33 570 79 600
equipment
Financial fixed assets 2 550 300 2 250
CURRENT ASSETS
Inventories 56 700 7 500 49 200
customers 120 370 2 100 118 270
Securities 2 250 60 2 190
Cash on hand 1 970 1970
TOTAL ASSETS 299 780 44 950 254 830 12
I The Balance Sheet
Corresponds to the CUMULATION of the calculated impairment losses of assets.

In fact, these are profits set aside to renew capital assets or offset expected losses.
FIXED ASSETS

Property, plant and
113 170 33 570 79 600
equipment
CURRENT ASSETS
Inventories 56 700 7 500 49 200
customers 120 370 2 100 118 270
TOTAL ASSETS 299 780 44 950 254 830 13
I The Balance Sheet
corresponds to the COMPREHENSIVE VALUE of ASSETS :
GROSS - depreciation, amortization and provisions
FIXED ASSETS

Property, plant and
113 170 33 570 79 600
equipment
CURRENT ASSETS
Inventories 56 700 7 500 49 200
customers 120 370 2 100 118 270
TOTAL ASSETS 299 780 44 950 254 830 14
I The Balance Sheet
These are goodwill, patents, licenses, goodwill ...
FIXED ASSETS

Property, plant and
113 170 33 570 79 600
equipment
CURRENT ASSETS
Inventories 56 700 7 500 49 200
customers 120 370 2 100 118 270
TOTAL ASSETS 299 780 44 950 254 830
15
I The Balance Sheet
These are the buildings, the land, the furniture,
the material ...
FIXED ASSETS

Property, plant and
113 170 33 570 79 600
equipment
CURRENT ASSETS
Inventories 56 700 7 500 49 200
customers 120 370 2 100 118 270
TOTAL ASSETS 299 780 44 950 254 830
16
I The Balance Sheet
These are mainly shares acquired in other companies.
companies to take control or exercise power ...
FIXED ASSETS

Property, plant and
113 170 33 570 79 600
equipment
CURRENT ASSETS
Inventories 56 700 7 500 49 200
customers 120 370 2 100 118 270
TOTAL ASSETS 299 780 44 950 254 830
17
I The Balance Sheet
These are Inventories
of raw materials, merchandise, etc.
or finished products at purchase
Gross price or production
Amortization cost
and Depreciation Net
FIXED ASSETS

Property, plant and
113 170 33 570 79 600
equipment
CURRENT ASSETS
Inventories 56 700 7 500 49 200
customers 120 370 2 100 118 270
TOTAL ASSETS 299 780 44 950 254 830
18
I The Balance Sheet
These are the credits granted to the customers, that is to say
accounts receivable from customers
FIXED ASSETS

Property, plant and
113 170 33 570 79 600
equipment
CURRENT ASSETS
stocks 56 700 7 500 49 200
customers 120 370 2 100 118 270
TOTAL ASSETS 299 780 44 950 254 830
19
I The Balance Sheet
These are shares or short-term investments
for speculative purposes or to invest cash.
FIXED ASSETS

Property, plant and
113 170 33 570 79 600
equipment
CURRENT ASSETS
Inventories 56 700 7 500 49 200
customers 120 370 2 100 118 270
TOTAL ASSETS 299 780 44 950 254 830
20
I The Balance Sheet
These are the liquid assets available on the accounts
banking, postal services, or at the cash desk
FIXED ASSETS

Property, plant and
113 170 33 570 79 600
equipment
CURRENT ASSETS
Inventories 56 700 7 500 49 200
customers 120 370 2 100 118 270
TOTAL ASSETS 299 780 44 950 254 830
21
I The Balance Sheet
the key elements: Liabilities
Liabilities indicate RESOURCES that have been disposed of by the company
since its creation, but also to whom it will be necessary to RETURN these
resources in a more or less short period of time
SHAREHOLDERS' EQUITY
• Capital 88 500
• reserves 10 050
• Profit for the year 34 350
Total 1 132 900

Provisions for liabilities and charges 6 000
DEBTS
• Borrowings (including bank loans 200 ) 7 870

• Tax and social security liabilities 10 350
Trade payables
97 710
•
Total 2 115 930
GENERAL TOTAL 254 830
22
I The Balance Sheet
The capital corresponds to the contributions of funds
by the shareholders, at the time of the company's creation
or on the occasion of a capital increase
• Capital 88 500
• reserves 10 050
Total 1 132 900

DEBTS

Trade payables
97 710
•
Total 2 115 930
23
I The Balance Sheet
Reserves are profits put aside
• Capital 88 500
• reserves 10 050
Total 1 132 900

DEBTS

Trade payables
97 710
•
Total 2 115 930
24
I The Balance Sheet
The result for the year corresponds to the profit
or loss for the year before
• Capital 88 500
• reserves 10 050
Total 1 132 900

DEBTS

Trade payables
97 710
•
Total 2 115 930
25
I The Balance Sheet
Provisions are profits put aside
to match probable losses
• Capital 88 500
• reserves 10 050
Total 1 132 900

DEBTS

Trade payables
97 710
•
Total 2 115 930
26
I The Balance Sheet
Borrowings correspond to the sums remaining
to be reimbursed to credit institutions
at the end of the fiscal year
• Capital 88 500
• reserves 10 050
Total 1 132 900

DEBTS

Trade payables
97 710
•
Total 2 115 930
27
I The Balance Sheet
Bank overdrafts correspond to overdrafts
• Capital 88 500
• reserves 10 050
Total 1 132 900

DEBTS

Trade payables
97 710
•
Total 2 115 930
28
I The Balance Sheet
Tax and social security liabilities correspond to the following debts
due to employees (net salaries) and social organizations
(URSSAF, ASSEDIC, PENSION FUNDS, ...),
related to the various contributions
• Capital 88 500
• reserves 10 050
Total 1 132 900

DEBTS

Trade payables
97 710
•
Total 2 115 930
29
I The Balance Sheet
These are the sums due to suppliers,
i.e. credits
obtained from suppliers
• Capital 88 500
• reserves 10 050
Total 1 132 900

DEBTS

Trade payables
97 710
•
Total 2 115 930
30
I -1 The Functional Balance Sheet
• The objective of the structural balance
analysis is to verify the financial balance of
the company and its medium-term
"solidity".
(! financial balance ≠ balance sheet balance)
• This financial balance is ensured when :

Long-term assets = long-term capital
Fixed assets = stable capital
31
I -1 The Functional Balance Sheet
• Allows the analysis of the financial

structure of a company
• Must be analyzed as an inventory of

economic resources (assets) and
financial resources (liabilities).
• Is the basis for analyzing the financial

balance and "structural" solidity of the
company.
32
• The classification of asset and
liability items is not based on time
criteria (Long-Medium or Short-
Term) but on the destination of the
capital raised by the company
(Liabilities) and the uses to which it
has been put (Assets).
33
I -1-1 The Functional Balance Sheet
- Reads "horizontally".
- Provides a clear breakdown of assets and
financing according to their nature and duration
of use
- Allows an analysis of the financial structure
- Allows to calculate the W.C.(working capital)
and W.C.R .(working capital requirement)
W.C. = Shareholders' equity + Depreciation,
amortization and provisions + DMLT - Gross
fixed assets
34
Example
As of 12/31, Secoma's balance sheet was as follows:
ASSETS Gross A&D Net LIABILITIES
Intangible fixed assets 80 60 20 Capital 500

property, plant and equipment 1000 300 700 Reserves 100
financial assets 400 50 350 profit for the year 60
inventories 320 20 300 provisions for contingencies 20
customers 180 30 150 provisions for charges 12
Notes receivable 151 151 borrowing from credit institutions (1) 820
State, income taxes 20 20 suppliers 50
miscellaneous receivables 7 7 notes payable 120
bank, CCP , cash 2 2 VAT to be disbursed 12
miscellaneous creditors 6
2160 460 1700 1700
(1) of which bank overdrafts 20
35
Example
A) WC Calculation
B) Calculation of operating and non-operating

working capital requirements
C) Calculation of working capital and cash flow
D) How the WCR is financed
36
Example
Note:
- depreciation, amortization and provisions for

impairment of assets are included in stable resources
(the volume of these provisions is constant over time,
so they are assimilated to sustainable resources).
- financial debts with maturities of < 1 year remain

within stable resources
On the other hand, the following are excluded: current
bank overdrafts, bank credit balances
37
Example
a) WC = Permanent resources- stable uses
Gross fixed assets Permanent resources
Intangible fixed assets 80 Capital 500

property, plant and equipment 1000 Reserves 100
financial assets 400 profit for the year 60
provisions for contingencies 20
provisions for charges 12
Total A&D 460
borrowing from credit institutions>1 year 800
1480
Working capital (WC) 472
38
Example
b) Operating working capital
OWCR = current operating assets - operating liabilities
current operating assets operating liabilities

inventories 320 suppliers 50
customers 180 notes payable 120
Notes receivable 151 VAT to be disbursed 12
651 182
OWCR = 651-182 = 469
39
Example
Non-operating working capital:
NOWCR = non-operating current assets - non-operating liabilities
non-operating current assets non-operating liabilities

State, income taxes 20 miscellaneous creditors 6
miscellaneous receivables 7
27 6
NOWCR = 27-6=21
40
Example
c) WCR and cash
WCR = 469 + 21 = 490
Cash = WC - WCR
Cash and cash equivalents = 472 - 490 = -18
Or cash= +2 -20= -18 => ok
41
Example
d) WCR Funding
The WCR is mainly financed by the WC

WC
472 The WCR is also financed by bank debt
WCR
490
T 18
42
Restatements, reclassifications and revaluations
necessary to obtain a functional balance sheet
Balance sheet Functional assessment
Balance sheet before distribution X X

Balance sheet after distribution
Reprocessing No 4 compartments on the assets

- reclassifications side
Gross values, depreciation, 4 compartments on the liabilities
amortization, provisions, net side
values, on the asset side Gross value of assets
Depreciation, amortization and
Bond redemption premiums provision in liabilities, in long-
term resources,
Borrowings and debts with credit
institutions : On the liabilities side, as a
-MLT decrease in financial debts
-Due in less than one year Long resources
-SCB - CBC
Expenses to be spread over
several fiscal years Long resources
Treasury
Reclassified in long uses
- Reviews Recovery of balance sheet
43
values
THE FUNCTIONAL ASSESSMENT
Means Economic Financial

Shareholders' equity
STABLE AND DURABLE FIXED ASSETS -uncalled capital
Intangible assets including formation + provisions for contingencies and
expenses and deferred charges losses
+ depreciation, amortization and
provisions over the entire actf
-Currency translation adjustment Act
+ conversion asset Liabilities
Financial debts (excluding bank

overdrafts)
Operation Inventories Advances and deposits received
Advances and deposits paid + trade payables
Operating receivables + tax and social security debts
Other operating receivables + non- (except corporate income tax)
operating prepaid expenses (gross + operating deferred revenue
value)
Non-operating Non-operating receivables Suppliers of fixed assets

VMP Miscellaneous tax liabilities (excluding
Prepaid expenses corporate income tax)
Non-operating (in gross values)
+ other non-operating liabilities
+ Deferred non-operating income
Marketable securities Bank overdrafts

Bank (overdraft, overdraft facilities)
Treasury Caisse
44
I -1-2 The Notion of Financial Equilibrium
• Long-term or stable uses must be

financed by long-term resources:
with stable funding needs, stable
funding resources
45
Analysis of the financial structure
Working Capital Requirements
46
Why is there a WCR?
The mismatch between the commitment and the cash flow
is one of the phenomena explaining the difference between
the income for the year and the change in cash flow.
=> It leads to the birth of a WCR or WCF
=>OWCR= inventories + operating receivables - operating

payables
OWCR positive Inventories
Supplier Credits
Trade receivables Advances and
customer deposits
Factors affecting the change in WCR
- Delay effect
=> The time difference between expenses and
disbursements and income and receipts
constitutes the WCR.
- Volume effect
=> Influence of activity level
- Price effect
=> Changes in purchase and selling prices
have an influence on the amount of WCR.
48
The financing of the WCR
• WCR requires mixed financing
- Stable portion: long-term financing
- Variable portion: short-term financing
• WCR funding must limit

- Dependence on financial institutions
- Cash surpluses
• The average* working capital requirement must

be financed by long-term resources.
*calculated on an annual basis (not just at the end of the year)
49
Calculation of turnaround times
It is essential to know the variations in each

component of the WCR in order to identify
corrective measures:
-Variation in inventory turnover times (for goods, raw

materials, finished products), in number of days
-The variation in the turnaround time of accounts
receivable
-The variation in accounts payable turnaround times
50
I -1-3 Analysis of the financial structure
The conditions for financial balance
=> static approach
51
The rule of minimum financial equilibrium
• Long-term uses financed by long-term

resources
• A surplus must exist :
=> Working capital :
long term resources - long needs
long-term resources - gross fixed assets
52
the cash flow relationship
Cash balance = WC - OWCR

Net cash = WC - OWCR - NOWCR
- WC depends on strategic decisions
- WCR: tactical choices (cash

payments ...), varies permanently
53
I -1-3 Analysis of the financial structure
The conditions for financial equilibrium
=> static approach
∆cash balance= ∆WC- ∆WCR
If ∆WC ≥ ∆WCR => the cash flow is increasing
Otherwise it decreases
54
I -1-4 The Analysis of Long Resources
Origin of long resources :

- Cash flow from operations (OCF)
- Increase in other own resources: capital
increases, investment grants
- Mid and long-term debt.
55
3.4. Analysis of one of the long resources: the CF
• Performance Indicator
• Contribution to financing needs coverage
• Cash surplus from operating activities,
financial and exceptional
Net accounting income
OCF
Depreciation, amortization and
provisions
Turnover
Cashable products
Taxes and IS
but not necessarily
Overheads cashed
Loads
Disbursements Personnel expenses
but not necessarily
disbursed
Consumption of raw materials
The OCF(continued)
• Features
- Cash surplus from operations
- operating
- financial
- outstanding
- Potential cash flow
Income and expenses not immediately received
- payment terms granted to clients
- payment terms obtained from suppliers
- storage times
- Corresponds to the maximum level of cash flow that could
be achieved in the absence of a dividend distribution.
- OCF/investment = degree of autonomy of the company
- Cash flow/outstanding financial debt = cash flow annuity in
relation to the repayment of bank debt
57
Calculation of the OCF
Subtractive Method Additive method
EBE
+
Fixed assets sold
Cashable products
-
- NAV of fixed assets sold
Cash expenses
-
Non-cashable income
+/- capital gains on fixed assets
sold +
RNC
58
Self-financing
=
Cash Flow for the year N
–
dividends distributed in N+1
59
OCF =
• A business performance indicator
• Contributes to the financing of the
company :
- Investments
- Repayment of loans
- Increase in BFRE
• Allows a dynamic analysis of the
financial equilibrium
60
Predicting flows
Change in WCR
Cash flow from
operations
Investments
Disposal of assets
Repayment of
existing debt
New debt
Dividends
Capital increase
61
I-2 Study of the financial balance sheet :
Enable a liquidity - solvency analysis
 Solvency: the ability of a company to pay

all of its actual debts with the proceeds
from the sale of all of its assets.
 Liquidity: a company's ability to meet its
short-term maturities with the proceeds
from the sale of its current assets.
62
Because
• It takes into account the maturity of
assets and debts;
• It takes into account real values
(appraised, market, fair value) as well as
the overall capital gain or loss resulting
from the revision of the value of assets
and debts.
63
Balance sheet
Total assets at actual value
-Total liabilities at fair value
___________________________________
= real value of the company's assets
(estimate)
64
Solvent company ? Liquid ?
Balance sheet
Active Liabilities
Net fixed assets 10 000 Shareholders' 12 000
equity
Inventories 3 000 Long-term bank 2 000
debt
Clients 4 000 Suppliers 4 000

Bank and cash 3 000 Short-term bank 2 000
Total 20 000 Total 20 000
65
• This company is :
- Solvable because Σ assets (20,000) > Σ
liabilities* (8,000)
* debt = long term bank + suppliers + short term
bank
- Liquid, because :
(Inventories + customers + bank and cash)>
(suppliers + short-term bank)
(3 000 + 4 000 + 3 000) > (4 000 + 2 000)
66
2. Solvent company ? Liquid ?
Net fixed assets 10 000 Shareholders' 5 000

equity
debt
TOTAL 20 000 TOTAL 20 000
67
This company is :
Solvable, because Σ assets (20,000) > Σ
liabilities (15,000)
Not liquid, because :
(Inventories + customers + bank and cash) < (suppliers + short-term bank)
3 000 + 4 000 + 3 000 < 8 000 + 5 000
68
3. Solvent company ? Liquid ?
Balance sheet
Active Liabilities
Net fixed assets 10 000 Shareholders' - 3 000
equity
Stocks 3 000 Long-term bank 17 000
debt
69
* Equity can be negative if one of its
components (retained earnings) is very < 0.
Shareholders' equity = share capital + reserves
+ retained earnings + profit for the year
Reserves = accumulated profits from previous
years not distributed to shareholders
Retained earnings: sum of unrestricted prior
year's earnings and losses
70
This company :
Is not solvent, because Σ assets (20,000) <
Σ debts (23,000)
Is liquid, because :
(Inventories + customers + bank and cash) > (suppliers + short-term bank)
(3 000 + 4 000 + 3 000) > (4 000 + 2 000)
71
4. Solvent company ?
Liquid ?
Balance sheet
Active Liabilities
Net fixed assets 14 000 Shareholders' - 3 000
equity

debt
72
This company is :
- nor solvent because : ∑ assets (20,000) < ∑ debts (23,000) ;
- nor liquid, because : (Inventories + customers + bank and cash) < (suppliers + short-term bank)
(3 000 + 2 000 + 1 000) < (5 000 + 2 000)
73
Another criterion for deciding to grant or
refuse credit to a company is its long-term
debt capacity.
This capacity is based on the following
prudential requirement: shareholders' equity
≥ long-term debt → long-term debt capacity
= shareholders' equity - long-term debt :
If the above balance sheets are used, the
companies:
1 and 2 have a positive long-term debt
capacity :
74
. Either: 12 000 - 2 000 = 10 000 for n°1
. Either : 5 000 - 2 000 = 3 000 for the n°2
-3 and 4 have a negative long-term debt
capacity :
. Either : - 3 000 - 17 000 = - 20 000 for n°3
. Either : - 3 000 - 16 000 = - 19 000 for n°4
75
FINANCIAL STATEMENT
Fixed assets (except those to be sold Shareholders' equity (excluding
within one year). dividends to be distributed).
Inventories (those with a storage period Financial debts (those to be repaid in
of more than one year. more than one year).
Receivables (those to be collected in Trade payables and tax and social
more than one year). security debts (those to be paid in more
than one year)
Overall revaluation gain or loss.
ACTIVE FOR MORE THAN ONE YEAR LIABILITIES DUE IN MORE THAN ONE
YEAR
Fixed assets (those to be sold within Dividends to be distributed.
one year). Stocks (those with a storage Financial debts (those to be repaid in
period of less than one year). less than a year).
Receivables (those that must be Trade payables and tax and social
collected in less than one year). security debts (those due in less than
Marketable securities. one year).
Availabilities
ASSETS LESS THAN ONE YEAR OLD LIABILITIES LESS THAN ONE YEAR
76
From the balance sheet to the financial statement
Balance sheet Financial balance sheet
Summary :
-Before x
distribution X
-After distribution
Reprocessing No
-classifications 2 compartments on the assets side
2 compartments on the liabilities side
No value
Gross value, depreciation, amortization, Net asset value
provisions, net asset value
Bond redemption premiums No values
Borrowings and debts with credit institutions

:
→MLT MLT → liabilities > 1 year
→ maturity less than one year from Maturity < 1 year liabilities < 1 year
repayment date
SCB - CBC
→ SCB - CBC
No values
Expenses to be spread over several fiscal
years
- Reviews Active: . VNC or appraised value
. No values* .
Liabilities: Consideration for non-values
= decrease in liabilities >1 year
77
• Non-values :
- Most of the set-up fees ;
- Expenses to be spread over several fiscal years ;
- Bond redemption premiums ;
- Translation differences on assets
(Liability translation adjustments are added to
shareholders' equity)
78
Financial analysis
II The Income Statement
Products
(revenues)
-
Loads
(expenses)
=
Result
79
Financial analysis
II The Income Statement
Loads Products
Performance
of the operating
commercial Operating income
and (loss)
industrial financial Current income
activity (loss)
Financial result
Contribution
of financial outstanding
operations to
Extraordinary income
comprehensi Global
(loss)
ve income total performance
of the
Result for the year company :
Its profit (or
Net accounting income loss)
80
II - Presentation of the income statement
First of all, the annual normal commercial operating activity
EXPENSES amount PRODUCTS amount

operating operating
Purchase of goods 310 000 Sale of goods 450 000
Change in inventories - 12 000 Production sold 121 035
Other purchases and 92 800 Stored production 0

expenses
external
Personnel expenses 38 550 Capitalized production 0
Depreciation and 62 630 Write-backs on 0

amortization depreciation and
amortization and prov
Total expenses 491 980 Total products 571 035

It is the turnover excluding VAT, generated by the resale
purchased goods, discounts and
discounts deducted

operating operating

expenses
external


This is the turnover generated by the sale of products
manufactured and services

operating operating

expenses
external


End stock > Initial stock
A POSITIVE variation means that all
production has not been sold .
It had to be stored .

operating operating

expenses
external


Final stock < Initial stock
the NEGATIVE variation means that the
production for the year was not sufficient to
ensure sales . It was necessary to DESTOCK

operating operating

External expenses
Depreciation and 62 630 Write-backs on depreciation 0

amortization and amortization and prov
Total 491 980 Total products 571 035
expenses
Part of the production has not been sold.
but kept in the company for its
REAL ESTATE needs

operating operating

External expenses


It is a CALCULATED PRODUCT, which
corresponds to the cancellation of depreciation and amortization
or provisions

operating operating

External expenses


It is the amount of the purchases of goods
excluding VAT, carried out during the year, discounts and
discounts deducted

operating operating

expenses
external


Final Inventories > initial Inventories
The NEGATIVE variation means that a portion of the
of the purchases was not sold but stored.
It must be subtracted from the purchases to obtain
the purchase cost of sales.

operating operating

External expenses


Final Inventories < initial Inventories
POSITIVE variation means that
purchases were not enough to achieve sales.
It must be added to purchases to obtain
the purchase cost of sales.

operating operating
Change in inventories 12 000 Production sold 121 035

External expenses


These are purchases of goods and services from
external suppliers except for goods:
supplies, rentals, subcontracting, advertising
electricity, postage, insurance....

operating operating

External expenses


These are the gross salaries, plus expenses
social employers

operating operating

external expenses


These are CALCULATED LOADS,
which correspond to depreciation and amortization and
to the provisions created for the year.

operating operating

external expenses


TOTAL operating income and expenses are as follows:

Operating 491 980 Operating 571 037
then the financial activity and the exceptionals must be integrated:

financial 8 000 financials 7 000
exceptional 12 000 exceptional 8 000
These products correspond to
investment interest , dividends
received, at cash discounts
obtained from suppliers...

These products are not part of the activity
current and cyclical. This often involves
the resale of fixed assets.

These expenses correspond to the interest paid
on borrowings, bank commissions,
discounts granted to customers

These expenses do not relate to current and cyclical activities. They are
often deductibles on claims, capital losses on the resale of assets, etc...

By integrating the financial activity and the exceptional :

TOTAL TOTAL
511 980 586 035
EXPENSES PRODUCTS
A result is determined by subtracting expenses from income, here one:

BENEFIT of : 586 035 – 511 980 = 74 055
This profit or loss will "balance" the income statement.
III - Operating Intermediate Management
Balances (operating IMB)
IMB must allow:
• A measure over time of the company's operational performance.
• A quick comparison of companies.
Problems:
• Lack of international conventions on definitions (example of trade
margin).
• The evolution of a company's activity changes its IMB.
• The activities of two companies are rarely identical and so are IMB!
Nevertheless here are some definitions...

IMB
Analysis of activity and profitability
Profitability indicators form the basis for determining the

company's performance (in particular the creation of
value for shareholders).
The result of the operating cycle is EBITDA.
- depreciation expense (investment cycle)
= operating income (EBIT)
+ result of the debt financing cycle (net financial income)
=
+ income from non-recurring operations
- Corporate income tax (CIT)
= Net income
103
Analysis of the income statement and the interim management balance
sheet (IMSB)
1- The income statement has 3 compartments that show 4
significant balances:
Operations Balance calculation method Significant balance
operating Operating income - operating Operating profit (loss)

expenses (EBIT)
financial Financial income - financial Financial result

expenses
outstanding Extraordinary income - Exceptional result (Exc.)

extraordinary expenses
EBIT+FR+Exc. - corporate Accounting net income

income tax (CIT) - employee
profit sharing
2- It is significant to study the evolution in time and space (inter-

company comparison) not of the Accounting net income alone,
but of each of its component results.
Anglo-Saxon terms used to designate certain balances :
- EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization),
which can be compared to EBITDA.
- EBIT (Earnings Before Interest and Taxes) corresponds to operating profit;
when it is calculated after a theoretical tax, it is called NOPAT (Net
Operating Profit After Tax).
- EVA (Economic Value Added), or value creation, calculated as follows :
Cash flow from operating activities
Operating cash flow plus inventory adjustments = Result
Earnings plus Interest net of tax (reintegrated to neutralize the financing

policy) = Operating profit after tax
Operating profit after tax minus cost of capital (i.e. cost of equity and LT
debt) = residual income
Residual result plus or minus after-tax effects of accounting restatements

= Economic Value Added or EVA
105
IMB Analysis: Key Questions
In terms of sales -Think about deflating the
turnover in order to reason in
constant euros (for highly
inflationary periods).
- check that the exercises all
have the same duration
- opening or closing of
manufacturing or production
units?
- have there been any new
product launches?
- have the terms of sale and/or
payment been modified?
106
Change in Sales Margin -Change in supplier conditions?
- significant changes in the
environment (increase in the price
of certain products)?
- have there been any changes in
the structure (start of integration)
107
Evolution of AV -was any equipment purchased
that was previously rented?
-Changes in the structure
(increased use of subcontracting,
absorption of upstream activities)?
- acquisition of new equipment or
processes (resulting in lower
energy and raw material costs)?
108
Evolution of EBITDA -New staff recruitment?
- Modernization of the production
tool to reduce personnel costs ?
- Has greater use been made of
temporary staff (more expensive
by the hour but more adaptable to
needs)? Changes in contribution
rates and tax bases?
109
Change in EBIT -Have there been any
investments?
- if so, at the beginning or end of
the fiscal year and what
amortization method was chosen?
110
Evolution Current Profit -Have any investments been
before Tax financed by borrowing (resulting
in additional financial
expenses)?
- Were there any financial
investments (originally financial
products) in contrast to previous
years?
111
Change in exceptional items -Did the company have to bear
redundancy costs?
- Has it suffered customer
default?
-Has it waived or benefited
from a debt write-off?
- did it realize capital gains or
losses on the sale of real
estate?
- received investment grants?
112
THE RATIOS
THERE ARE SEVERAL TYPES OF FINANCIAL ANALYSIS RATIOS:
• Profitability ratios
• Liquidity ratios
• Leverage Ratios
• Utilization Ratios
• Market price ratios
AND THE LIST IS NOT EXHAUSTIVE...
113
Profitability ratios
They allow the company's economic performance to be assessed.
t = legal tax rate
114
NOTES:
ECONOMIC PROFITABILITY...
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑅𝑒𝑠𝑢𝑙𝑡 (𝐸𝐵𝐼𝑇 ) 𝐸𝐵𝐼𝑇 𝑆𝑎𝑙𝑒𝑠(𝑒𝑥𝑐𝑙 .𝑉𝐴𝑇 )

𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑅𝑎𝑡𝑒𝑜𝑓𝑅𝑒𝑡𝑢𝑟𝑛= = ∗
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠(𝑒𝑥𝑐𝑙. 𝑉𝐴𝑇 ) 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐𝐶𝑎𝑝𝑖𝑡𝑎𝑙
Level of performance of the means implemented to carry out the

company's activity, called economic capital, or economic assets =
economic rate of return.
• Economic capital = Net operating fixed assets + net WCR, net of provisions for impairment of
operating current assets
• Net profit margin and asset turnover rate tend to vary inversely
• Companies that add significant value to a product (e.g. Dassault Systemes) may require high
profit margins, but adding value to a product generally requires large investments (= assets)
with low turnover (low asset turnover). In contrast, a retail group (e.g. Carrefour) adds very
little value to the product and has a low profit margin, but a very high asset turnover.
115
NOTES:
FINANCIAL PROFITABILITY...
Return on Equity =
ROE is a widely used indicator but has significant limitations:
• ROE Value Problem uses the book value, not the market value, of equity. It is therefore the
return for an investor who can buy the company's equity at its book value!
• Risk Problem. What are the risks / will the company take to generate its ROE? You need to
consider leverage
Financial leverage
Financial Result
Avec : Fd = financial debts ; Cd = cost of debt
This formula is based on the following economic asset financing (EAF) assumption: EAF = CE + Fd
(economic assets are financed only by long resources)
116
• Consequence of this formula :
If Economic Rate > Cd FR > Economic Rate , leverage effect
If Economic Rate < Cd FR < Economic Rate, sledgehammer effect
If Economic Rate = Cd FR = Economic Rate
If DF = 0 FR = Economic Rate
• Ratio-based approach to financial profitability
FR=
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 x x x
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒𝑇𝑎𝑥
Now, by hypothesis: EC = CE + FD
FR= x x + x ( + )
x
These different ratios the impact of the impact of Economic Impact of the
make it possible to extraordinary financial Rate financing structure
measure : income and management adopted
expenses and tax
117
• Practical limits to financial leverage :
DF
- The level of the ratio is limited by the banks ;
CP
- It is advisable for the company to maintain a certain debt capacity in

order to be able to take advantage of investment opportunities;
- Cd increases with the level of indebtedness (remuneration of

banking risk); disadvantage: the marginal cost of debt may become
higher than Economic Rate .
118
Liquidity and leverage ratios
They enable the company's risks to be assessed
Fixed assets (Net) Equity
Building, Property, Paid up capital

Machines, Plants Retained earnings...
Equipments
(PPE) Long Term Debt:
Patents, goodwill Loans from Banks

Bonds Issued
Customer Credit =
Accounts Receivables
Supplier Credit =
Prepaid expenses Accounts Payable
Accrued expenses
Inventory:
Raw materials
Goods in progress
Finished goods Notesissued / Short term
debt
=
Cash in Bank Banks short term loans
Marketable Securities
119
Liquidity and leverage ratios
They enable the company's risks to be assessed
It should be greater than 1
We do not take into account stocks, typically discounted by 60% in case of liquidation .
Cannot be less than 1... but difficult to standardise
Is often subject to a covenant, ideally it should not be greater than 3.
Usually based on the fact that the LMT debts must be lower than the equity;
exceptions are possible (e.g. for lessors...).
120
Technical ratios
Appreciated by professionals
121
Valuation ratios
Concerns "investors
122
THE END
Thank you for your attention
123

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Financial Analysis ISC 2022

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Financial Analysis

• Resources providers (e.g., lenders,

Determine risks (solvency)

Studying the Financial Balance Sheet to analyze

Studying the income statement to analyze

• Under IFRS (International Financial Reporting

 Assets are what the company owns (its uses...)

 Liabilities represent its financing (its resources...)

 Assets and liabilities are presented by increasing availability (French chart of

And so on and so forth... 7

What happens if the property is resold?

Shareholders' equity • Capital stock

Intangible assets 2 770 1 420 1 350

Corresponds to the CUMULATION of the calculated impairment losses of assets.

Gross Amortization and Depreciation Net

Intangible assets 2 770 1 420 1 350

Gross Amortization and Depreciation Net

Intangible assets 2 770 1 420 1 350

Gross Amortization and Depreciation Net

Intangible assets 2 770 1 420 1 350

Gross Amortization and Depreciation Net

Intangible assets 2 770 1 420 1 350

Intangible assets 2 770 1 420 1 350

Intangible assets 2 770 1 420 1 350

Intangible assets 2 770 1 420 1 350

Intangible assets 2 770 1 420 1 350

Intangible assets 2 770 1 420 1 350

Total 1 132 900

• Borrowings (including bank loans 200 ) 7 870

Total 1 132 900

• Borrowings (including bank loans 200 ) 7 870

Total 1 132 900

• Borrowings (including bank loans 200 ) 7 870

Total 1 132 900

• Borrowings (including bank loans 200 ) 7 870

Total 1 132 900

• Borrowings (including bank loans 200 ) 7 870

Total 1 132 900

• Borrowings (including bank loans 200 ) 7 870

Bank overdrafts correspond to overdrafts

Total 1 132 900

• Borrowings (including bank loans 200 ) 7 870

Total 1 132 900

• Borrowings (including bank loans 200 ) 7 870

Total 1 132 900

• Borrowings (including bank loans 200 ) 7 870

• This financial balance is ensured when :

• Allows the analysis of the financial

• Must be analyzed as an inventory of

• Is the basis for analyzing the financial

ASSETS Gross A&D Net LIABILITIES

Intangible fixed assets 80 60 20 Capital 500

2160 460 1700 1700

(1) of which bank overdrafts 20

B) Calculation of operating and non-operating

C) Calculation of working capital and cash flow

D) How the WCR is financed

- depreciation, amortization and provisions for

- financial debts with maturities of < 1 year remain

Gross fixed assets Permanent resources

Intangible fixed assets 80 Capital 500

b) Operating working capital

OWCR = current operating assets - operating liabilities