F&A week 3

Microlesson 1 - Importance of Analyzing Financial Statements

• Analyzing financial statements helps to evaluate financial performance effectively.

Financial Analysis Example: Fairphone B.V. Statement of Income and Expenses (2022)

Which way of

reporting data

helps you more to

evaluate the

financial

performance?

Key Figures

• Net Turnover: €58,834,042

• Other Operating Income: €63,537

• Total Operating Income: €58,897,579

• Raw Materials and Consumables: -€34,645,277

• Other External Charges: -€6,586,194

• Wages and Salaries: -€6,789,877

• Social Security Costs: -€884,716

• Amortisation/Depreciation: -€3,463,735

• Other Operating Expenses: -€5,507,613

• Total Operating Expenses: -€57,877,412

• Interest Expenses and Similar Charges: -€663,316

• Result (Income) Before Taxation: €356,851

• Taxation: -€312,845

• Net Result (Income) for the Year: €44,006

Financial Analysis Comparison: Fairphone B.V. (2021 vs. 2022)

Comparative Figures

• Total Operating Expenses: -€57,877,412 for 2022, compared to -€37,353,690 for 2021.

• Net result change shows a decrease from €3,649,512 in 2021 to €44,006 in 2022, indicating financial strain.

Financial Statement Analysis Tools

• Comparison Bases for Analysis:

  • Intracompany: Same company, different time periods.

  • Intercompany: Different companies, same time period.

  • Industry average: Compare results to industry averages.

• Tools Utilized for Analysis:

  • Horizontal Analysis

  • Vertical Analysis

  • Ratio Analysis

Microlesson 2 - Analysis Methods

Horizontal Analysis

• Definition: Shows percentage changes year over year to evaluate series of data over time.

• Limitation: It identifies trends but does not explain "why" changes occur.

• Example Calculations (2022 vs. 2021):

  • Formula: Amount Change = Year 1 - Year 0

  • Net Turnover Change Calculation:

    • Amount Change: €58,834,042 - €36,961,604 = €21,872,438

    • % Change: €21,872,438 / €36,961,604 = 59%

Vertical Analysis

• Definition: Shows proportionate financial statement items relative to a base (100%).

• Key Insight: Compares financial item % across companies in the same industry.

• Example: Calculation of Net Turnover as the base item in financial statements.

Microlesson 3 - Financial Ratios Overview

Overview of Financial Ratios

• Definition: Financial ratios provide insights by measuring the relationship between different financial statement numbers.

• Purpose: To compare results with industry averages, competitors, and past ratios.

Types of Financial Ratios:

1. Profitability Ratios: Measure how well the company generates profits.

2. Leverage Ratios: Assess the extent of a company's debt usage.

3. Liquidity Ratios: Evaluate if a company has enough cash to manage obligations.

4. Efficiency Ratios: Analyze how effectively a company uses its assets and capital.

Microlesson 4 - The Operating Cycle and the Cash Conversion Cycle

Operating Cycle Components:

1. Buying inventories from suppliers

2. Paying for inventories to the suppliers

3. Selling inventories to customers

4. Receiving cash from customers

• Importance: A shorter operating cycle indicates more efficiency in company operations.

Cash Conversion Cycle (CCC)

• Definition: The period between payments made to suppliers and cash received from customers.

Calculation of CCC:

• Formula:
  $ext{CCC} = ext{Inventories Turnover Period} + ext{Collection Period for Trade Receivables} - ext{Settlement Period for Trade Payables}$

Business Events Impacting the Cash Conversion Cycle

1. Delays in customer payments ⇒ Longer collection period increases CCC.

2. Suppliers demanding quicker payments ⇒ Shorter settlement period can also increase CCC.

3. Slower inventory turnover ⇒ Longer inventory turnover period increases CCC.

4. Combination of these factors can lead to a cash deficit.

Managerial Actions to Reduce Cash Conversion Cycle

1. Shorten Days Sales Outstanding (DSO) via stricter credit terms.

2. Reduce Days Inventory Outstanding (DIO) through better inventory management.

3. Lengthen Days Payables Outstanding (DPO) by negotiating extended supplier payment terms.