Comprehensive Study Notes on Annual Financial Statements, EBIT, and Financing Strategies for Financing Types

EBIT (Earnings Before Interests and Taxes)

EBIT serves as the measure of a company's earnings before the deduction of interests and taxes. It represents the compensation provided to capital providers for both equity and debt capital. Furthermore, EBIT reflects the operating power (Ertragskraft) of the company. It allows for conclusions regarding the operating result (the core business) since it identifies the operational earning power without being influenced by special factors, such as the specific composition of equity (EK) and debt (FK), the legal form of the entity, or the specific tax burden.

By accounting for financial expenses, financial income, and taxes separately, this key figure enables a direct comparison between different companies or an analysis of a single company's performance across different time periods.

EBIT can be calculated using two primary methods and one detailed alternative structure:

Direct Method

The direct method is derived from operating income and expenses: $\text{Operating Income} - \text{Operating Expenses} = \text{EBIT (Ordinary Operating Result)}$

Indirect Method

The indirect method is based on the commercial profit and loss statement (P&L): $\text{Net Income (Jahresüberschuss)}$ $+ \text{Financial Expenses (e.g., interest expenses)}$ $- \text{Financial Income (e.g., interest income)}$ $+ \text{Tax Expenses}$ $- \text{Tax Income}$ $= \text{EBIT}$

Detailed Alternative Calculation

This method breaks down the operating components step-by-step: $\text{Sales Revenues}$ $+ \text{Increase in Inventory of Finished and Unfinished Goods}$ $+ \text{Other Operating Income}$ $- \text{Expenses for Raw Materials, Consumables, and Supplies (RHB) and Purchased Goods}$ $- \text{Personnel Expenses (Wages and Salaries, Social Security, Pensions)}$ $- \text{Depreciation of Intangible Assets and Property, Plant, and Equipment (Sachanlagen)}$ $- \text{Other Operating Expenses}$ $= \text{EBIT}$

Systematization of Financing Types (Finanzierungsarten)

Before determining the appropriation of profits, it is necessary to categorize the various forms of financing available to a company. These are distinguished primarily by the source of capital and the legal status of the capital provider.

Capital Source (Kapitalherkunft)

Financing is divided into Internal Financing (Innenfinanzierung) and External Financing (Außenfinanzierung).

Internal Financing: Capital generated from within the company's own operations.
External Financing: Capital brought in from external markets or providers.

Legal and Power Status (Rechts-/Machtstellung der Kapitalgeber)

This tracks whether the capital provided creates an ownership stake or a debt obligation. Notably, the involvement of debt capital providers (FK-Geber) can sometimes hinder business activities due to their rights of co-determination or restrictive covenants.

Equity Financing (Eigenfinanzierung): Funding provided by owners or through retained earnings.
Debt Financing (Fremdfinanzierung): Funding provided by creditors (loans/credits).

Specific Forms of Internal and External Financing

Self-Financing (Selbstfinanzierung)

Self-financing is a form of equity financing generated internally. It is split into open and silent forms.

Open Self-Financing (Offene Selbstfinanzierung): This involves retained earnings. The calculation is typically as follows: $\Delta \text{Legal Reserves (Ges.RL)} + \Delta \text{Other Reserves (and. RL)} + \text{Profit Carryforward (GV)}$ from previous years plus current profits and minus future carryforwards.

Silent Self-Financing (Stille Selbstfinanzierung): This occurs through the creation of hidden reserves.

Undervaluation of Assets: Setting the book value lower than the market value.
Overvaluation of Liabilities: For example, overstating provisions (Rückstellungen).
The result of silent self-financing is a lower reported profit, which leads to reduced dividend payouts and lower tax burdens.

Financing from Provisions (Finanzierung aus Rückstellungen)

This occurs primarily through pension provisions. By recognizing provisions, expenses are recorded that reduce the taxable profit, but no immediate cash outflow occurs. This preserves liquidity within the company.

Equity/Participation Financing (Beteiligungsfinanzierung)

In the context of a Stock Corporation (AG), this is external equity financing. It is calculated as: $\Delta \text{Subscribed Capital (gez. Kapital)} + \Delta \text{Capital Reserves (KRL)}$

Credit Financing (Kreditfinanzierung)

This takes the form of loans (Darlehen). In an Annuity Loan, the total payment (interest + principal) remains constant, with the interest portion decreasing and the principal increasing. In an Installment Loan, the principal remains constant, causing interest and the total rate to fall over time.

Decision Tree for Financing Options

Financing can be structured hierarchically as follows:

External Financing (Außenfinanzierung): - Equity Financing: Participation financing (Beteiligungsfinanzierung). - Debt Financing: Credits, Credit substitutes, Promissory note loans (Schuldscheindarlehen), and the emission of Debt securities (Forderungspapieren).
Internal Financing (Innenfinanzierung): - Financing from Depreciation (Abschreibung). - Financing from Provisions (Rückstellung). - Financing from Asset Divestment (Vermögensumschichtung). - Self-Financing (Eigenfinanzierung): - Open Self-Financing: e.g., retained profits added to reserves. - Silent Self-Financing: e.g., undervaluation of assets or overvaluation of liabilities.

Annuity vs. Installment Loans (Annuitäten- und Abzahlungsdarlehen)

When financing large-scale investments, companies often utilize debt through two specific loan structures:

1. Annuity Loan (Annuitätendarlehen)

A fixed total Euro amount is paid annually, known as the Annuity ( $Annuität$ ). This payment consists of both interest and principal (Tilgung). Over the term of the loan, the interest portion decreases (as the remaining debt shrinks) and the principal portion increases symmetrically, keeping the total payment constant.

2. Installment Loan (Abzahlungsdarlehen)

In this structure, a fixed principal amount ( $Tilgung$ ) is paid annually. Because the interest is calculated on a shrinking remaining debt while the principal payment stays the same, the total annual payment (Abzahlungsrate) gets smaller each year.

Comparative Case Study: UNTERNEHMER AG

UNTERNEHMER AG plans a new investment of $500,000\,€$ starting 01.01.2018. Two offers are compared, with interest and principal due at the end of each year.

Offer I: Annuity Loan

Interest rate: $4\,\% \text{ p.a.}$
Principal in year 1: $8\,\%$

Offer II: Installment Loan

Interest rate: $4\,\% \text{ p.a.}$
Duration: $10\text{ years}$

Comparative Analysis (First Two Years)

Annuity Table (Offer I):

2018: Starting Debt: $500.00\text{ Tsd. }€$ . Interest ( $4\,\%$ ): $20.00\text{ Tsd. }€$ . Principal ( $8\,\%$ ): $40.00\text{ Tsd. }€$ . Annuity: $60.00\text{ Tsd. }€$ . Remaining Debt: $460.00\text{ Tsd. }€$ .
2019: Starting Debt: $460.00\text{ Tsd. }€$ . Interest ( $4\,\%$ of 460): $18.40\text{ Tsd. }€$ . Principal ( $60 - 18.40$ ): $41.60\text{ Tsd. }€$ . Annuity: $60.00\text{ Tsd. }€$ . Remaining Debt: $418.40\text{ Tsd. }€$ .
Liquidity Burden (2 Years): $20.00 + 40.00 + 18.40 + 41.60 = 120.00\text{ Tsd. }€$ .

Installment Table (Offer II):

2018: Starting Debt: $500.00\text{ Tsd. }€$ . Interest ( $4\,\%$ ): $20.00\text{ Tsd. }€$ . Principal ( $500 \div 10$ ): $50.00\text{ Tsd. }€$ . Rate: $70.00\text{ Tsd. }€$ . Remaining Debt: $450.00\text{ Tsd. }€$ .
2019: Starting Debt: $450.00\text{ Tsd. }€$ . Interest ( $4\,\%$ of 450): $18.00\text{ Tsd. }€$ . Principal: $50.00\text{ Tsd. }€$ . Rate: $68.00\text{ Tsd. }€$ . Remaining Debt: $400.00\text{ Tsd. }€$ .
Liquidity Burden (2 Years): $20.00 + 50.00 + 18.00 + 50.00 = 138.00\text{ Tsd. }€$ .

Conclusion: The annuity loan results in a lower liquidity burden during the first two years of the term compared to the installment loan.