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Financial statement analysis Christophe Thibierge thibierge@escpeurope.eu
Financial statement analysis Christophe Thibierge thibierge@escpeurope.eu
Financial statement analysis Christophe Thibierge thibierge@escpeurope.eu

Financial statement analysis

Christophe Thibierge thibierge@escpeurope.eu

Agenda of this module

Agenda of this module
Agenda of this module • Develop a good understanding of the financial documents (Income statement, Balance

Develop a good understanding of the financial documents (Income statement, Balance sheet, Statement of cash-flows)

Learn the fundamental ratios and indicators

Understand the different kind of cash-flows, and the way they are generated

© C. Thibierge - www.thibierge.net

2
2

Contents

Contents
Contents • accounting and financial information (the issue of databases) • the income statement – margins,

accounting and financial information (the issue of databases)

the income statement

margins, cash flows

the balance sheet

liquidity and debt ratios

the Operating Working Capital

ratios of return

return on assets

return on capital employed (ROCE)

return on equity (ROE) and gearing / leverage

the statement of cash flows

Appendixes

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3
3

Financial information

Financial information
Financial information – Accounting standards and harmonization • « Local » standards (US GAAP, UK GAAP,

Accounting standards and harmonization

« Local » standards (US GAAP, UK GAAP, Plan comptable général )

IFRS – International Financial Reporting Standards

Financial reports

Balance sheet

Income statement

Cash flow statement

Notes to the accounts

Web sites

corporate (e.g. Danone, Microsoft, Sanofi

stock markets (e.g. Euronext, Nasdaq)

meta-sites (e.g. Yahoo Finance)

© C. Thibierge - www.thibierge.net

)

4
4

Two documents

An event always impacts 2

in one

accounts ● Difference Opex / Capex ● Difference interest / Debt ● ●
accounts
Difference Opex / Capex
Difference interest / Debt

Difference depreciation / investment (Capex)

© C. Thibierge - www.thibierge.net

Contents

Contents
Contents • accounting and financial information (the issue of databases) • the income statement – margins,

accounting and financial information (the issue of databases)

the income statement

margins, cash flows

the balance sheet

liquidity and debt ratios

the Operating Working Capital

ratios of return

return on assets

return on capital employed (ROCE)

return on equity (ROE) and gearing / leverage

the statement of cash flows

Appendixes

© C. Thibierge - www.thibierge.net

6
6

The income (profit & loss – P&L) statement

The income (profit & loss – P&L) statement

A movie of activities during a period

Revenues - Expenses = Net Earnings

Intermediate results « explain » Net earnings

Net earning is not 100%, instant, cash

© C. Thibierge - www.thibierge.net

A « startup » in pharmaceuticals

A « startup » in pharmaceuticals

Dermic-Oz

INCOME STATEMENT

2009

2010

2011

2012

2013

Dermic-Oz INCOME STATEMENT 2009 2010 2011 2012 2013   Sales 134,4 194,2 291,7 373,8 481,9
 

Sales

134,4

194,2

291,7

373,8

481,9

-

cost of goods sold*

-25,8

-35,0

-47,0

-59,7

-75,1

Gross profit

108,5

159,3

244,7

314,1

406,7

-

Selling, General and Adm. Expenses*

-146,6

-188,6

-244,9

-297,9

-361,3

Operating profit (EBIT)

-38,0

-29,3

-0,2

16,2

45,4

-

Interest

-4,1

-5,7

-7,9

-10,2

-13,3

+ Financial revenues

0,0

0,0

0,0

0,0

0,0

Earnings Before Tax (EBT)

-42,2

-35,1

-8,2

6,0

32,1

Extraordinary items

0,0

0,0

0,0

0,0

0,0

-

Tax

0,0

0,0

0,0

-2,0

-10,7

Net Earnings

-42,2

-35,1

-8,2

4,0

21,4

* including depreciation for :

-5,3

-6,0

-6,8

-7,7

-8,6

EBITDA

© C. Thibierge - www.thibierge.net

2009

-32,7

2010

-23,3

2011

6,6

2012

23,8

2013

54,0

8
8

Detailed P&L

Detailed P&L
Detailed P&L INCOME STATEMENT 2009 2010 2011 2012 2013 Sales – own production 134,4 188,2

INCOME STATEMENT

2009

2010

2011

2012

2013

Sales – own production

134,4

188,2

258,5

332,6

422,1

Milestones revenues

0,0

0,0

5,0

0,0

0,0

Royalties on sales and other revenues

0,0

6,0

28,2

41,2

59,8

Total sales and revenues

134,4

194,2

291,7

373,8

481,9

-

cost of goods sold (excl. Depreciation)

-22,6

-31,3

-42,8

-55,0

-69,8

- depreciation (operating assets)

-3,2

-3,7

-4,2

-4,7

-5,3

Gross profit

108,5

159,3

244,7

314,1

406,7

- Research and Development expenses

-69,9

-103,6

-149,9

-193,0

-244,9

- selling and marketing expenses

-14,9

-19,8

-26,2

-32,9

-41,0

- overheads and administrative costs

-59,6

-62,8

-66,2

-69,1

-72,1

- depreciation (non operating assets)

-2,1

-2,3

-2,6

-2,9

-3,3

Operating profit (EBIT)

-38,0

-29,3

-0,2

16,2

45,4

-

interest expenses

-4,1

-5,7

-7,9

-10,2

-13,3

+ financial revenues

0,0

0,0

0,0

0,0

0,0

Earnings Before Tax (EBT)

-42,2

-35,1

-8,2

6,0

32,1

Extraordinary items

0,0

0,0

0,0

0,0

0,0

-

Tax

0,0

0,0

0,0

-2,0

-10,7

Net Earnings

-42,2

-35,1

-8,2

4,0

21,4

2009

2010

2011

2012

2013

EBITDA

-32,7

-23,3

6,6

23,8

54,0

© C. Thibierge - www.thibierge.net

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9

Major items

Major items
Major items • Sales : amount delivered and billed • Cost of goods sold : direct

Sales : amount delivered and billed

Cost of goods sold : direct costs

Selling, general and administrative expenses : indirect costs (« overheads »)

EBITDA : Earning before interest, tax, depreciation and amortization

EBIT : Earning before interest and tax

EBT : Earning before tax

Net earnings

© C. Thibierge - www.thibierge.net

10
10

The income statement

The income statement

A movie of activities during a period

Revenues - Expenses = Net Earnings

Intermediate results « explain » Net earnings

Net earning is not 100%, instantaneous, cash

© C. Thibierge - www.thibierge.net

Cash and non-cash scriptures

Cash and non-cash scriptures
Cash and non-cash scriptures I N C O M E S T A T E M

INCOME STATEMENT

2009

2010

2011

2012

2013

Sales – own production

134,4

188,2

258,5

332,6

422,1

Milestones revenues

0,0

0,0

5,0

0,0

0,0

Royalties on sales and other revenues

0,0

6,0

28,2

41,2

59,8

Total sales and revenues

134,4

194,2

291,7

373,8

481,9

-

cost of goods sold (excl. Depreciation)

-22,6

-31,3

-42,8

-55,0

-69,8

-

depreciation (operating assets)

-3,2

-3,7

-4,2

-4,7

-5,3

Gross profit

108,5

159,3

244,7

314,1

406,7

- Research and Development expenses

-69,9

-103,6

-149,9

-193,0

-244,9

- selling and marketing expenses

-14,9

-19,8

-26,2

-32,9

-41,0

- overheads and administrative costs

-59,6

-62,8

-66,2

-69,1

-72,1

-

depreciation (non operating assets)

-2,1

-2,3

-2,6

-2,9

-3,3

Operating profit (EBIT)

-38,0

-29,3

-0,2

16,2

45,4

-

interest expenses

-4,1

-5,7

-7,9

-10,2

-13,3

+ financial revenues

0,0

0,0

0,0

0,0

0,0

Earnings Before Tax (EBT)

-42,2

-35,1

-8,2

6,0

32,1

Extraordinary items

0,0

0,0

0,0

0,0

0,0

-

Tax

0,0

0,0

0,0

-2,0

-10,7

Net Earnings

-42,2

-35,1

-8,2

4,0

21,4

EBITDA

© C. Thibierge - www.thibierge.net

2009

-32,7

2010

-23,3

2011

6,6

2012

23,8

2013

54,0

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12

Cash-flow

Cash-flow

Top-down approach

Cash-flow Top-down approach   2009 2010 2011 2012 2013 EBITDA -32,7 -23,3 6,6 23,8
 

2009

2010

2011

2012

2013

EBITDA

-32,7

-23,3

6,6

23,8

54,0

- interest expenses

-4,1

-5,7

-7,9

-10,2

-13,3

+ financial revenues

0,0

0,0

0,0

0,0

0,0

Extraordinary items

0,0

0,0

0,0

0,0

0,0

-

Tax

0,0

0,0

0,0

-2,0

-10,7

Cash-flow

-36,9

-29,0

-1,3

11,6

30,0

Bottom-up approach

 

2009

2010

2011

2012

2013

Net Earnings

-42,2

-35,1

-8,2

4,0

21,4

+

adding back depreciation

5,3

6,0

6,8

7,7

8,6

Cash-flow

-36,9

-29,0

-1,3

11,6

30,0

© C. Thibierge - www.thibierge.net

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13

Some limits

Some limits

Bottom-Up approach

Commonly used – « Lazy »

Can lead to mistakes

Cash-flow is not cash-flow

• Can lead to mistakes – Cash-flow is not cash-flow • Some non-cash scriptures remain (change

Some non-cash scriptures remain (change in inventories)

Does not consider delays in payment / collection

There is a better calculation : (Operating or Free) cash-flow

Nonetheless, useful

© C. Thibierge - www.thibierge.net

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14

Contents

Contents
Contents • accounting and financial information (the issue of databases) • the income statement – margins,

accounting and financial information (the issue of databases)

the income statement

margins, cash flows

the balance sheet

liquidity and debt ratios

the Operating Working Capital

ratios of return

return on assets

return on capital employed (ROCE)

return on equity (ROE) and gearing / leverage

the statement of cash flows

Appendixes

© C. Thibierge - www.thibierge.net

15
15

The balance sheet (B/S)

The balance sheet (B/S)
The balance sheet (B/S) • Picture of the company at a given date • Assets are

Picture of the company at a given date

Assets are recorded on a historical cost basis

But can/must be revalued (IFRS)

Provisions and depreciation account for reduction in assets values

© C. Thibierge - www.thibierge.net

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16

Dermic-Oz balance sheet

Dermic-Oz balance sheet
Dermic-Oz balance sheet BALANCE SHEET Assets 2009 2010 2011 2012 2013 Property, plant and equipment 69,1

BALANCE SHEET

Assets

2009 2010

2011

2012

2013

Property, plant and equipment

69,1

78,7

89,4

100,3

112,3

- Depreciation

-23,4

-29,4

-36,2

-43,9

-52,5

Net property plant and equipment

45,7

49,4

53,2

56,4

59,8

Non-consolidated companies

0,0

0,0

0,0

0,0

0,0

Net fixed assets

45,7

49,4

53,2

56,4

59,8

Inventories*

30,6

42,0

56,6

71,8

93,5

Accounts receivable**

25,0

36,4

51,9

64,9

80,1

Cash and Marketable securities

397,8

363,7

328,0

328,8

319,0

Net current assets

453,4

442,2

436,5

465,4

492,7

TOTAL ASSETS

499,1

491,5

489,7

521,9

552,5

* after accounting for provisions of :

0,0

0,0

0,0

0,0

0,0

** after accounting for provisions of :

0,0

0,0

0,0

0,0

0,0

Liabilities and Sh. Equity

2009 2010

2011

2012

2013

Shareholders' Equity

429,9

394,8

386,6

390,6

412,0

Paid-in capital

600,0

600,0

600,0

600,0

600,0

Net earnings

-42,2

-35,1

-8,2

4,0

21,4

Retained earnings

-128,0

-170,1

-205,2

-213,4

-209,4

Long Term debt

54,7

74,7

74,7

94,7

94,7

Accounts payable

13,5

19,6

27,9

34,9

43,1

Short term debt / Notes payable

1,1

2,4

0,4

1,6

2,6

TOTAL LIABILITIES & SH. EQU.

499,1

491,5

489,7

521,9

552,5

© C. Thibierge - www.thibierge.net

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17

Operating Working Capital (OWC)

Operating Working Capital (OWC)

Net Working Capital (NWC)

Working Capital Requirements (WCR)

Working capital needs

« Working capital »

Item which is not present in the balance sheet

Crucial indicator for

Financial analysis

Financial planning

Short-term management

Capital budgeting

Company valuation / stock market valuation

© C. Thibierge - www.thibierge.net

Dermic-Oz OWC

Dermic-Oz OWC
Dermic-Oz OWC Operating Working Capital (OWC) = Inventories + Accounts receivable – Accounts payable Operating Working

Operating Working Capital (OWC) = Inventories + Accounts receivable – Accounts payable

Operating Working Capital (OWC)

 

2009

2010

2011

2012

2013

Inventories

30,6

42,0

56,6

71,8

93,5

+ Accounts receivable

+25,0

+36,4

+51,9

+64,9

+80,1

- Accounts payable

-13,5

-19,6

-27,9

-34,9

-43,1

= Operating Working Capital (OWC)

42,1

58,8

80,5

101,7

130,5

A discussion at Dermic-Oz

© C. Thibierge - www.thibierge.net

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19

Operating Working Capital

Operating Working Capital
Operating Working Capital • Real investment in cash, just like investment in Machines or Buildings •

Real investment in cash, just like investment in Machines or Buildings

Generally correlated with Sales, and paid in advance

« Compulsory » investment

Never to be forgotten

© C. Thibierge - www.thibierge.net

Sales Illiquidity OW C 20 Time
Sales
Illiquidity
OW
C
20
Time

OWC correlated to sales ?

OWC correlated to sales ?
OWC correlated to sales ? O W C = Inventories  Receivables – Payables OWC ×

O W C = Inventories Receivables – Payables

OWC × 365 = Inventories × 365 Receivables × 365 Payables

Sales

Sales

Sales

Sales

© C. Thibierge - www.thibierge.net

× 365

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21

Application

Application

Operating Working Capital (OWC)

Application Operating Working Capital (OWC)   2009 2010 2011 2012 2013 Inventories 30,6 42,0
 

2009

2010

2011

2012

2013

Inventories

30,6

42,0

56,6

71,8

93,5

+ Accounts receivable

+25,0

+36,4

+51,9

+64,9

+80,1

- Accounts payable

-13,5

-19,6

-27,9

-34,9

-43,1

=

Operating Working Capital (OWC)

42,1

58,8

80,5

101,7

130,5

OWC in days of sales

 

2009

2010

2011

2012

2013

Inventories in days of sales

83,1 d.

78,9 d.

70,8 d.

70,1 d.

70,8 d.

+ Accounts receivable in days of sales

67,9 d.

68,5 d.

64,9 d.

63,4 d.

60,7 d.

- Accounts payable in days of sales

-36,6 d.

-36,9 d.

-35,0 d.

-34,1 d.

-32,7 d.

=

Operating Working Capital (OWC) in days

114,4 d.

110,5 d.

100,8 d.

99,3 d.

98,9 d.

Inventories = DOH = Days On Hand Accounts receivable = DSO = Days of Sales Outstanding Accounts Payable = DPO = Days of Payment Outstanding

© C. Thibierge - www.thibierge.net

22
22

Contents

Contents
Contents • accounting and financial information (the issue of databases) • the income statement – margins,

accounting and financial information (the issue of databases)

the income statement

margins, cash flows

the balance sheet

liquidity and debt ratios

the Operating Working Capital

ratios of return

return on assets

return on capital employed (ROCE)

return on equity (ROE) and gearing / leverage

the statement of cash flows

Appendixes

© C. Thibierge - www.thibierge.net

23
23

Ratios of return – concept

Ratios of return – concept

Ratio of Return = Investment Earnings

Ratio of Return = Investment E a r n i n g s Assets or Capital

Assets

or

Capital

Engaged

© C. Thibierge - www.thibierge.net

Shareholders'

Equity

Financial Debt or Net Debt

24
24

Return on assets (ROA)

Return on assets (ROA)

EBIT

Assets = Sales × Assets

EBIT

Sales

(ROA) EBIT Assets = Sales × Assets EBIT Sales Return On Assets = Operating margin x

Return On Assets = Operating margin x Asset turnover

Cater Pillar

Tom Cat Herring

25
25

© C. Thibierge - www.thibierge.net

Contents

Contents
Contents • accounting and financial information (the issue of databases) • the income statement – margins,

accounting and financial information (the issue of databases)

the income statement

margins, cash flows

the balance sheet

liquidity and debt ratios

the Operating Working Capital

ratios of return

return on assets

return on capital employed (ROCE)

return on equity (ROE) and gearing / leverage

the statement of cash flows

Appendixes

© C. Thibierge - www.thibierge.net

26
26

Capital engaged (employed)

Capital engaged (employed)
Capital engaged (employed) BALANCE SHEET Assets 2013 Property, plant and equipment - Depreciation Net property

BALANCE SHEET Assets

2013

Property, plant and equipment - Depreciation Net property plant and equipment Non-consolidated companies Net fixed assets

112,3

-52,5

59,8

0,0

59,8

Inventories Accounts receivable Cash and Marketable securities Net current assets

93,5

80,1

319,0

Capital employed (engaged)

2013

492,7

 

Net fixed assets

59,8

TOTAL ASSETS

552,5

Operating working capital (OWC) Cash and Marketable securities

130,5

 

319,0

Liabilities and Sh. Equity

2013

=

Capital employed (engaged)

509,4

Shareholders' Equity Paid-in capital Net earnings Retained earnings

412,0

Shareholders' Equity

412,0

600,0

Financial debts (Long and short T)

97,3

21,4

=

Capital employed (engaged)

509,4

-209,4

Long Term debt

94,7

Accounts payable

43,1

Short term debt / Notes payable

2,6

TOTAL LIABILITIES & SH. EQU.

552,5

© C. Thibierge - www.thibierge.net

27
27

Capital engaged (employed) and ROCE

Capital engaged (employed) and ROCE
Capital engaged (employed) and ROCE   N - 4 N-3 N-2 N-1 N Net fixed assets
 

N-4

N-3

N-2

N-1

N

Net fixed assets

247,8

174,3

100,8

27,3

10,2

OWC

126,6

162,3

196,8

234,9

215,6

Cash and Marketable securities

23,3

24,5

25,8

26,9

26,3

=

Capital engaged

397,7

361,1

323,4

289,1

252,0

Shareholders' Equity

256,6

227,8

199,5

174,8

154,1

Financial debts (Long and short T)

141,1

133,3

123,9

114,4

97,8

=

Capital engaged

397,7

361,1

323,4

289,1

252,0

Capital engaged 397,7 361,1 323,4 289,1 252,0 Return On Capital Employed (ROCE) = Operating margin x

Return On Capital Employed (ROCE) = Operating margin x Capital engaged turnover

28
28

© C. Thibierge - www.thibierge.net

Return on capital employed (ROCE)

Return on capital employed (ROCE)

Fixor

Return on capital employed (ROCE) Fixor   N-4 N-3 N-2 N-1 N Operating margin 10,0% 12,6%
 

N-4

N-3

N-2

N-1

N

Operating margin

10,0%

12,6%

11,8%

11,3%

11,3%

x Capital engaged turnover

1,76

2,14

2,54

3,04

3,41

= Return on Capital Employed (ROCE)

17,6%

27,1%

29,9%

34,2%

38,7%

Happy Hostels

 

N-4

N-3

N-2

N-1

N

Operating margin

4,3%

2,4%

3,6%

4,3%

5,7%

x Capital engaged turnover

5,34

5,35

5,39

5,44

5,48

= Return on Capital Employed (ROCE)

22,8%

13,1%

19,6%

23,6%

31,1%

© C. Thibierge - www.thibierge.net

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29

Return on capital employed (ROCE)

Return on capital employed (ROCE)
Return on capital employed (ROCE) EBIT EBIT Sales Fixed assets  OWC = Sales × Fixed

EBIT

EBIT

Sales

Fixed assetsOWC = Sales × Fixed assetsOWC

Return On Capital Employed = Operating margin x Capital engaged turnover

Tom Cat Herring

30
30

© C. Thibierge - www.thibierge.net

Contents

Contents
Contents • accounting and financial information (the issue of databases) • the income statement – margins,

accounting and financial information (the issue of databases)

the income statement

margins, cash flows

the balance sheet

liquidity and debt ratios

the Operating Working Capital

ratios of return

return on assets

return on capital employed (ROCE)

return on equity (ROE) and gearing / leverage

the statement of cash flows

Appendixes

© C. Thibierge - www.thibierge.net

31
31

World with no tax

World with no tax
World with no tax Capital Engaged EBIT 20 © C. Thibierge - www.thibierge.net Sh. Equity Debt
Capital Engaged
Capital
Engaged

EBIT

20

© C. Thibierge - www.thibierge.net

Sh. Equity

Debt - Interest =
Debt
-
Interest
=

8

with no tax Capital Engaged EBIT 20 © C. Thibierge - www.thibierge.net Sh. Equity Debt -

Earnings

12

32
32

No tax, but a leverage effect

No tax, but a leverage effect
No tax, but a leverage effect Capital Engaged = 100 EBIT R O C E =
Capital Engaged = 100 EBIT R O C E = CapEng 20 = 20 %
Capital Engaged =
100
EBIT
R O C E =
CapEng
20
= 20 %
100

© C. Thibierge - www.thibierge.net

Sh. Equity = 20

Debt = 80

Interest rate = Interest Debt

8

80

= 10 %

Interest rate = I n t e r e s t Debt 8 8 0 =

ROE = Net Earnings Sh. Equity

12

20

= 60 %

33
33

Formula without tax

Formula without tax

ROE = RO C E [ ROCE i  ×

Debt Equity ]

O C E  [  ROCE − i  × Debt Equity ] Leverage effect

Leverage effect

The final return for the shareholder consists in

The return on operations

+ The leverage effect

This effect, in turn, consisting in

A differential (ROCE – i)

Multiplied by the Leverage (D / E)

© C. Thibierge - www.thibierge.net

Formula with tax

Formula with tax
Formula with tax • The leverage effect : ROE =  ROCE  [  ROCE

The leverage effect :

ROE = ROCE [ ROCE i ×

© C. Thibierge - www.thibierge.net

Debt Equity ]× 1 T

Effective tax rate for company

35
35

Application and comments

Application and comments
Application and comments 36 © C. Thibierge - www.thibierge.net
36
36

© C. Thibierge - www.thibierge.net

Limits – Compare companies

Limits – Compare companies

Cool Jazz

Hard Rock

Heavy Metal

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(ROCE – Interest) x Leverage = Leverage effect

15 % 5% × 100

200 =5%

11 % 6%  × 150

150 =5%

15 % 14 % × 250 = 5%

50

Limits / dangers of the concept

Limits / dangers of the concept
Limits / dangers of the concept • In order to increase the Return, you have to

In order to increase the Return, you have to increase Risk (D/E)

Better high differential x low leverage than the opposite

Everything starts from the operations

To be used as a tool for diagnosis, not for prospective management

© C. Thibierge - www.thibierge.net

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38

Some more thoughts for experts

Some more thoughts for experts

What do we do with Cash ?

Part of the Capital engaged ?

Deducted from debt, to show Net debt ?

What do we do with financial revenues ?

Part of the ROCE ?

Deducted from interest, to show Net interest ?

© C. Thibierge - www.thibierge.net

Contents

Contents
Contents • accounting and financial information (the issue of databases) • the income statement – margins,

accounting and financial information (the issue of databases)

the income statement

margins, cash flows

the balance sheet

liquidity and debt ratios

the Operating Working Capital

ratios of return

return on assets

return on capital employed (ROCE)

return on equity (ROE) and gearing / leverage

the statement of cash flows

Appendixes

© C. Thibierge - www.thibierge.net

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40

Back to cash-flows

Back to cash-flows

The statement of cash-flows :

Back to cash-flows • The statement of cash-flows : – Cash-flow from operations / operating cash-flow

Cash-flow from operations / operating cash-flow

Cash-flow from investments

Cash-flow from financing

= cash generation (or cash consumption) over the year

© C. Thibierge - www.thibierge.net

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41

From cash-flow to operating cash-flow

From cash-flow to operating cash-flow
From cash-flow to operating cash-flow Operating Cash-flow = Cash-flow - Increase in Operating Working Capital  

Operating Cash-flow = Cash-flow - Increase in Operating Working Capital

 

2009

2010

2011

2012

2013

Net earnings

-42,2

-35,1

-8,2

4,0

21,4

+

add back Depreciation / writeoffs

5,3

6,0

6,8

7,7

8,6

Cash-flow

-36,9

-29,0

-1,3

11,6

30,0

increase in inventories

11,4

14,6

15,2

21,8

+

increase in receivables

11,4

15,5

13,0

15,2

-

increase in payables

-6,2

-8,3

-7,0

-8,2

= increase in Operating Working Capital

16,7

21,7

21,2

28,8

Cash-flow

-29,0

-1,3

11,6

30,0

-

increase in OWC

-16,7

-21,7

-21,2

-28,8

= Operating cash flow

-45,7

-23,0

-9,5

1,2

© C. Thibierge - www.thibierge.net

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42

Cash is king

Cash is king

Net earnings : not 100%, instant cash

Net earnings + Depreciation = cash-flow

Cash-flow – increase in Op. Work. Cap. = real, instantaneous, operating cash-flow

Operating cash-flow – Investment =

© C. Thibierge - www.thibierge.net

Free cash flow

Dermic-Oz

Statement of cash-flows

 

2009

2010

2011

2012

2013

Net earnings

-42,2

-35,1

-8,2

4,0

21,4

+

add back Depreciation / writeoffs

5,3

6,0

6,8

7,7

8,6

Cash-flow

-36,9

-29,0

-1,3

11,6

30,0

increase in inventories

11,4

14,6

15,2

21,8

+

increase in receivables

11,4

15,5

13,0

15,2

-

increase in payables

-6,2

-8,3

-7,0

-8,2

= increase in Operating working capital

16,7

21,7

21,2

28,8

Cash-flow

-29,0

-1,3

11,6

30,0

-

increase in OWC

-16,7

-21,7

-21,2

-28,8

=

Operating cash flow (A)

-45,7

-23,0

-9,5

1,2

Investments (net of disinvestments)

-9,7

-10,7

-10,9

-12,0

=

cash flow from investments (B)

-9,7

-10,7

-10,9

-12,0

*Free cash-flow to Equity (A+B)

-55,4

-33,7

-20,5

-10,7

+

increase in capital

,0

,0

,0

,0

-

dividends

,0

,0

,0

,0

+

increase in debt

21,3

-2,0

21,2

1,0

=

cash flow from financing (C)

21,3

-2,0

21,2

1,0

CHANGE IN NET CASH (A+B+C)

-34,1

-35,7

0,7

-9,7

+

Cash at beginning of year

397,8

363,7

328,0

328,8

= cash at end of year

363,7

328,0

328,8

319,0

Cash in the balance sheet

363,7

328,0

328,8

319,0

© C. Thibierge - www.thibierge.net

Appendix 1 Ratios
Appendix 1 Ratios
Appendix 1 Ratios

Appendix 1

Ratios

Ratios of margin

Ratios of margin
Ratios of margin 46 © C. Thibierge - www.thibierge.net
46
46

© C. Thibierge - www.thibierge.net

Balance sheet ratios

Balance sheet ratios
Balance sheet ratios 47 © C. Thibierge - www.thibierge.net
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47

© C. Thibierge - www.thibierge.net

Ratios of return

Ratios of return
Ratios of return 48 © C. Thibierge - www.thibierge.net
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48

© C. Thibierge - www.thibierge.net

and

a focus on ROCE / ROIC

and a focus on ROCE / ROIC
and a focus on ROCE / ROIC Note : WCR = working capital requirements = OWC
and a focus on ROCE / ROIC Note : WCR = working capital requirements = OWC

Note : WCR = working capital requirements = OWC = operating working capital

© C. Thibierge - www.thibierge.net

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49

Liquidity ratios

Liquidity ratios
Liquidity ratios 50 © C. Thibierge - www.thibierge.net
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50

© C. Thibierge - www.thibierge.net

Solvency ratios

Solvency ratios
Solvency ratios 51 © C. Thibierge - www.thibierge.net
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51

© C. Thibierge - www.thibierge.net

Appendix 2 Consolidated accounts Audit and IFRS
Appendix 2 Consolidated accounts Audit and IFRS
Appendix 2 Consolidated accounts Audit and IFRS

Appendix 2

Consolidated accounts Audit and IFRS

Consolidation

Consolidation

Perimeter

Different consolidation methods

Revaluations

Audit opinions

© C. Thibierge - www.thibierge.net

and their signification

Appendix 3 Basics of cost accounting
Appendix 3 Basics of cost accounting
Appendix 3 Basics of cost accounting

Appendix 3

Basics of cost accounting

The question of Fixed and Variable costs

The question of Fixed and Variable costs

120

The question of Fixed and Variable costs 120 VC 10 VC 90 FC 90 FC 10
VC 10 VC 90 FC 90 FC 10 Riskos Coolos 55
VC 10
VC 90
FC 90
FC 10
Riskos
Coolos
55

© C. Thibierge - www.thibierge.net

Appendix 4 How to do a financial analysis
Appendix 4 How to do a financial analysis
Appendix 4 How to do a financial analysis

Appendix 4

How to do a financial analysis

How to do a financial analysis

How to do a financial analysis

2 ideas :

How to do a financial analysis • 2 ideas : – go from basic observations to

go from basic observations to complex models ; don’t forget basics !

Everything must be connected : tell the story

© C. Thibierge - www.thibierge.net

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57

Example of inductive analysis

Example of inductive analysis

Company’s development

Example of inductive analysis – Company’s development • growth • asset structure ; capital structure (debt

growth

asset structure ; capital structure (debt equity)

Profitability

Margins

Operating working capital

Return on assets, Return on Capital Employed (ROCE), Return on Equity (ROE)

Cash flow(s)

Risk

short-term (liquidity)

long-term (solvency)

© C. Thibierge - www.thibierge.net

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58

How to comment on a ratio / indicator

How to comment on a ratio / indicator
How to comment on a ratio / indicator

1. Level, evolution

2. Good / bad ; risky / safe

3. Possible explanationS

1. Hypothesis 1

2. Hypothesis 2

3.

4. Try to validate the correct hypothesis – tell the story

5. Recommendations

59
59

Occam's razor

Occam's razor
Occam's razor 60
60
60

As a conclusion

As a conclusion
As a conclusion « Grace comes from perfection, perfection comes from art and art does not

« Grace comes from perfection, perfection comes from art

and

art does not come easily ! »

Norman McLean, A river runs through it

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61