12. Financial analysis B 12 / 1 BUSINESS ECONOMICS 5 / 6 Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 2 12.0 OVERVIEW 12.1 FINANCIAL ANALYSIS: WHAT + WHY? page B 12 / 3 12.2 BALANCE SHEET page B 12 / 4 12.3 INCOME STATEMENT page B 12 / 6 12.4 LIQUIDITY page B 12 / 8 12.5 SOLVENCY page B 12 / 9 12.6 PROFITABILITY page B 12 / 10 12.7 OPERATING CYCLE page B 12 / 13 12.8 EXERCISES page B 12 / 15 12.9 VOCABULARY page B 12 / 23 Copyright Mark Van Couwenberghe, 2017-2018

12.1 FINANCIAL ANALYSIS: WHAT + WHY? B 12 / 3 12.1 FINANCIAL ANALYSIS: WHAT + WHY? Financial analysis consists of an analysis of the company’s financial statements (balance sheet + income statement + “explanation” + social balance sheet; see later) to evaluate the financial performance of the company It is a very important source of information for various stakeholders Explain why: Management: Shareholders: Creditors: Competitors: Customers: Employees: Government: … Format of financial statements described in accounting legislation Copyright Mark Van Couwenberghe, 2017-2018

12.2 BALANCE SHEET ASSETS = LIABILITIES B 12 / 4 A balance sheet displays the sources and use of the company’s resources at a given point in time. ASSETS (increasing liquidity) LIABILITIES (increasing retrievability) 1 IMMATERIAL FIXED ASSETS 8 SHARE CAPITAL 2 MATERIAL FIXED ASSETS 9 RESERVES 3 FINANCIAL FIXED ASSETS 10 RETAINED EARNINGS 4 RECEIVABLES > 1Y EQUITY FIXED ASSETS 11 PROVISIONS 5 STOCKS 12 PAYABLES > 1Y 6 RECEIVABLES < 1Y LT DEBT 7 LIQUID ASSETS 13 PAYABLES < 1Y CURRENT ASSETS ST DEBT TOTAL ASSETS = LIABILITIES Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 5 EXPLANATION 1 2 3 4 5 6 7 8 9 10 11 12 13 Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 6 12.3 INCOME STATEMENT An income statement displays the costs and revenue of the company over a certain period of time and enables to define the result (profit or loss) COSTS REVENUE 1 RAW MATERIALS 7 TURNOVER 2 SERVICES 3 STAFF 4 DEPRECIATION OPERATIONAL COSTS OPERATIONAL REVENUE 5 INTERESTS 8 FINANCIAL COSTS FINANCIAL REVENUE 6 EXCEPTIONAL COSTS 9 EXCEPTIONAL REVENUE TOTAL Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 7 RESULT RESULT BEFORE TAXES TAXES EXPLANATION NET RESULT 1 2 3 4 5 6 7 8 9 Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 8 12.4 LIQUIDITY Liquidity means the degree to which a company is capable to pay the ST debt Especially interesting information for suppliers: will the company pay its invoices on time? NET WORKING CAPITAL = CURRENT ASSETS - ST DEBT Must be > 0 If not, company may be forced to sell fixed assets, this endangers continuity CURRENT RATIO = CURRENT ASSETS __________________ ST DEBT Must be > 1 Ideal: 1,20 – 1,30 If too high, too much money is “stuck” in company’s current assets (e.g. stocks) ACID RATIO = CURRENT ASSETS - STOCKS ___________________________ ST DEBT Must be > 1 Stocks not included (least liquid current asset) Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 9 12.5 SOLVENCY Solvency means the degree to which a company is capable to pay all debt The more a company uses equity, the bigger the chance it will be able to pay the debt + create extra debt (e.g. get extra loans) That is why especially banks are interested to know the solvency DEGREE OF FINANCIAL INDEPENDENCE = EQUITY __________________ TOTAL LIABILITIES The higher, the better Belgian average: 30% To be compared with average of activity sector LT DEBT COVERAGE = CASHFLOW __________________ LT DEBT The higher, the better (cashflow = net result + depreciation) REVERSE LT DEBT COVERAGE = LT DEBT ___________________________ CASHFLOW The smaller, the better = number of years needed to pay LT debt with cashflow Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 10 12.6 PROFITABILITY Profitability means the degree to which a company generates return on its investments NET RETURN ON EQUITY= NET RESULT __________________ EQUITY The higher, the better To be compared with average of activity sector Must be considerably > net return on low-risk investments Link with solvency: high solvency >>> low expected return (and vice versa) TOTAL NET RETURN = NET RESULT + INTERESTS __________________________ TOTAL LIABILITIES The higher, the better To be compared with average of activity sector FINANCIAL LEVERAGE = NET RETURN ON EQUITY ___________________________ TOTAL NET RETURN Explanation: see next page Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 11 Explanation of financial leverage: If a company only uses equity (no debt) to finance its operations, it will be completely financially independent” but… it “misses” the (tax) advantage of paying interests An example: Company A Company B € 1.000.000 equity € 1.000.000 equity € 0 debt € 2.000.000 debt (€ 40.000 interests = 5%) € 100.000 net result € 100.000 net result NRE = 10% NRE = 10% TNR = 10% TNR = 4,6% FL = 1 FL = 2,17 return of investment = cost of investment return of investment > cost of investment no extra return using debt creates extra return! FL should always be > 1 B 12 / 11 Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 12 DIVIDEND PER SHARE = DIVIDEND ________________________ NUMBER OF SHARES High: positive for shareholders, but this also means that profit flows-out Therefore: should be balanced INTRINSIC SHARE VALUE = EQUITY ________________________ NUMBER OF SHARES To be compared with share price (stock exchange): SP < ISV: interesting (possible increase of SP) SP > ISV: risk (possible decrease of SP) NET RESULT PER SHARE = NET RESULT ________________________ NUMBER OF SHARES To be compared with dividend (dividend policy) DIVIDEND RETURN = DIVIDEND ________________________ SHARE PRICE (see dividend per share) Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 13 12.7 OPERATING CYCLE Operating cycle is the cycle of purchasing (paying money ) and selling (receiving money) The operating cycle should be balanced STOCKS CIRCULATION TIME (days) = STOCKS _______________ x 365 RAW MATERIALS The smaller, the better To be compared with the average of the activity sector RECEIVABLES CIRCULATION TIME (days) = RECEIVABLES < 1Y ________________ x 365 TURNOVER Should be around 30 The smaller, the better To be compared with competitors (if too low, company may lose customers) PAYABLES CIRCULATION TIME (days) = PAYABLES < 1Y __________________ x 365 RAW MATERIALS + SERVICES Should be around 30 The higher, the better To be compared with competitors (if too high, company may lose suppliers) Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 14 NET PERIOD TO FINANCE (days) = STOCKS CIRCULATION TIME + RECEIVABLES CIRCULATION TIME - PAYABLES CIRCULATION Should be: 0 If too high, following measures can be taken: decrease stocks (just-in-time management) push customers to pay faster negotiate with suppliers to pay later Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 15 12.5 EXERCISES Perform a full financial analysis on the financial statements of the following company: ASSETS 000 € LIABILITIES 1 IMMATERIAL FIXED ASSETS 97,385 8 SHARE CAPITAL 1,288,732 2 MATERIAL FIXED ASSETS 56,520 9 RESERVES 1,950,492 3 FINANCIAL FIXED ASSETS 8,953,498 10 RETAINED EARNINGS 3,513,524 4 RECEIVABLES > 1Y 4,127,195 EQUITY 6,752,748 FIXED ASSETS 13,234,598 11 PROVISIONS 360,352 5 STOCKS 11,679 12 PAYABLES > 1Y 2,318,600 6 RECEIVABLES < 1Y 232,625 LT DEBT 2,678,952 7 LIQUID ASSETS 888,735 13 PAYABLES < 1Y 4,935,937 CURRENT ASSETS 1,133,039 ST DEBT TOTAL 14,367,637 Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 16 COSTS 000 € REVENUE 1 RAW MATERIALS 425,855 7 TURNOVER 981,703 2 SERVICES 414,537 3 STAFF 194,181 4 DEPRECIATION 143,291 OPERATIONAL COSTS 1,177,864 OPERATIONAL REVENUE 5 INTERESTS 210,723 8 488,707 FINANCIAL COSTS FINANCIAL REVENUE 6 EXCEPTIONAL COSTS 36,736 9 EXCEPTIONAL REVENUE 245,427 TOTAL 1,425,323 1,715,837 Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 17 RESULT 000 € RESULT BEFORE TAXES 290,514 TAXES 34,161 NET RESULT 256,353 Extra information: 12,887,320 = number of shares 50% of net result is paid in the form of dividends share price = € 113,00 Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 18 LIQUIDITY MEASURE CALCULATION COMMENT Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 19 SOLVENCY MEASURE CALCULATION COMMENT Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 20 PROFITABILITY MEASURE CALCULATION COMMENT Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 21 OPERATING CYCLE MEASURE CALCULATION COMMENT Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 22 OPERATING CYCLE MEASURE CALCULATION COMMENT Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 23 12.6 VOCABULARY EN NL Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 24 EN NL Copyright Mark Van Couwenberghe, 2017-2018

B 12 / 25 EN NL Copyright Mark Van Couwenberghe, 2017-2018