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

2. 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,

3. 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,

4. 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,

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

6. 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,

7. B 12 / 7 RESULT RESULT BEFORE TAXES TAXES EXPLANATION NET RESULT 1 2 34 5 6 7 8 9
Copyright Mark Van Couwenberghe,

8. 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,

9. 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,

10. 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,

11. 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
€ equity € equity
€ 0 debt € debt (€ interests = 5%)
€ net result € net result
NRE = 10% NRE = 10%
TNR = 10% TNR = 4,6%
FL = 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,

12. 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,

13. 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,

14. 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,

15. 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,

16. 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,

17. 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,

18. B 12 / 18 LIQUIDITY MEASURE CALCULATION COMMENT
Copyright Mark Van Couwenberghe,

19. B 12 / 19 SOLVENCY MEASURE CALCULATION COMMENT
Copyright Mark Van Couwenberghe,

20. B 12 / 20 PROFITABILITY MEASURE CALCULATION COMMENT
Copyright Mark Van Couwenberghe,

21. B 12 / 21 OPERATING CYCLE MEASURE CALCULATION COMMENT
Copyright Mark Van Couwenberghe,

22. B 12 / 22 OPERATING CYCLE MEASURE CALCULATION COMMENT
Copyright Mark Van Couwenberghe,

23. B 12 / 23
12.6 VOCABULARY EN NL
Copyright Mark Van Couwenberghe,

24. B 12 / 24 EN NL
Copyright Mark Van Couwenberghe,

25. B 12 / 25 EN NL
Copyright Mark Van Couwenberghe,