Financial statements, for many people, are unfathomable documents written in strange language that only accountants can understand. Surrendered by their apparent complexity, they sometimes make business decisions based on wrong assumptions. This is unfortunate, since with a little education, it is possible to discover how revealing these financial reports can be, starting from them the financial situation of the company is obtained according to the results obtained once the operations have been carried out. a date or period.
INTRODUCTION
The need for continuous improvement and the flexibility necessary to adapt to changes is important for businessmen and managers to be successful, but for this they need to judge the causes and effects of the company's management, so This constitutes the starting point to be able to foresee the risks in the business activity management process, thus managing to act consistently with behavioral trends and that can predict, for the development of alternative strategies and plans for the future, the economic situation and financial.
For this to work properly, the analysis of the Financial Statements is indispensable, constituting a way to achieve the objectives argued later, discarding the criterion that their analysis is somewhat limited to cold diagnosis and only reserved to accounting and financial specialists.
For a company, the Financial Statements are the instruments that attest to the success or failure of business management and issue warning signs of the entity's difficulties. The analysis of a company from its financial statements is essential to diagnose its situation and to evaluate any decision with economic and financial repercussions, since they are documents whose purpose is to provide information on the company's financial situation to support decision-making. They cover a wide range, which include:
- Operational Solutions. Preparation of Plans. Preparation of action programs. Design of Policies. Establishment of Objectives.
Financial statements, for many people, are unfathomable documents written in strange language that only accountants can understand. Tired of their apparent complexity, they sometimes make business decisions based on wrong assumptions. This is unfortunate, since with a little education, it is possible to discover how revealing these financial reports can be, starting from them the financial situation of the company is obtained according to the results obtained once the operations have been carried out. a date or period. Using a step-by-step approach, with clear examples, the lecturer systematically removes layers of complexity to reveal the financial facts that can be extracted with a few simple calculations.
From what has been said, it can be deduced that the preparation of the Basic Financial Statements, Situation Statements (Balance Sheet), and Results are not an end in itself, quite the contrary, marks the beginning of the analytical stage.
The forms of direction and planning of the economy, as well as that of administering the different economic objectives of the country have evolved along with the changes that have occurred and the modern forms of negotiation of productions; always based on accounting information, which is a powerful instrument of management. The intelligent use of this information can probably only be achieved if the managers of the business understand the essential aspects of the accounting process, which ends with a final product, the financial statements and the analysis of these statements, which allows us to know the reality behind that information.
The Management of the Meat Company of Las Tunas, is located at Ave. Camilo Cienfuegos No. 370, Reparto Buena Vista in the city of Las Tunas. It is subordinated to the Union of Edible Meat, Oils and Fats and belongs to the Ministry of the Food Industry.
For the development of its activities it has productive establishments in the municipalities of Colombia, Puerto Padre, Manatí and Las Tunas, its workforce is made up of 659 workers. Most of its productions are subsidized, which include the basic basket and social consumption.
Social object:
- Carry out the slaughter of major and minor cattle in national currency. Produce and market wholesale and in national currency and currency meats and their derivatives of different types and qualities, fresh meat, canned meats and fats. Obtain, process and commercialize wholesale and in national currency and currency edible and non-edible by-products such as leather, bait, antlers, eyelashes, bile, hairs and animal meal. Market wholesale and in national currency and currency products produced by other entities of the Union system Edible Meat, Oils and Fats. Market wholesale and in national currency and in textured soybean currency to authorized entities. Offer cargo transportation services in national currency.
The Company is inserted in the Business Improvement process and has the following structure:
- 1 General Directorate5 Functional Directorates6 Base Units (UEB)
For the Cárnica de Las Tunas company, it is vital to determine the problems that affect it, in order to recognize both the threats and opportunities that come from outside the company, as well as its weaknesses and strengths, which exist internally. You cannot act against a problem until its causes are identified and located, as has already been pointed out.
Problem: The company does not carry out an economic-financial analysis of its Working Capital sufficiently in depth and with the most objective techniques that allow it to know the causes of its financial problems and improve its situation.
Hypothesis: If a correct analysis of the management of Working Capital is carried out, through the use of different methods and techniques, it will be possible to improve, in correspondence with it, the financial situation of the company.
The objective to be achieved with the completion of this work is to carry out a financial economic analysis that makes it possible to diagnose the real situation, both economic and financial, of the company, through the analysis and comparison in relatively equal stages of the Working Capital, where reflect the main trends and locate the causes of the problems, leading to the search for quick and accurate solutions.
Chapter I: THEORETICAL FOUNDATION
The Financial Statements allow analyzing the information by means of which the economic position and financial position of a company can be evaluated.
Economic Position: The ability of a company to obtain results, through the comparison of all income with all expenses; These results can be positive or negative (profit or loss).
Financial Position: A company's ability to meet its debts at their respective maturity dates (short and long-term debts).
By analyzing the Financial Statements, a diagnosis of the economic and financial situation of the company can be made, fulfilling the conditions of: Periodicity, Punctuality and Accuracy; starting from the following financial statements:
- Balance Sheet Profit or Loss or Loss Statement Working Capital Variation Status Cost of Production Sold Status
In carrying out this work, analysis and comparison were used as the interpretation methodology. Analyzing means studying, examining, observing the behavior of an event. To achieve this truthfully and accurately, it is necessary to be profound, which implies not limiting the analysis to everything.
Carrying out these analyzes is a valuable tool for the operations of a company, it is also an effective ally of fundamental importance, since it will give the ability to adopt measures in a position of control, planning and project studies.
With a monthly analysis it is possible to delimit the appearance of problems more accurately, since the period of analysis of the economic events is small, which makes the analysis a very powerful weapon, considering that through this activity various signs can be revealed alert.
The science of analysis is made up of the set of techniques that are applied and that range from the use of percentages and deviations, to the application of the same to analyze the influence of factors on a deviation and the elaboration of states to establish the movement of operations.
The application of adequate techniques to analyze the Financial Statements should lead, in an inverse process to that of the construction of accounting, up to the problems that the effects that these statements show have generated, and from there, through a cause-effect analysis, to the causes that have originated them.
Based on this point, it is necessary to understand the need to know and apply a set of techniques for the analysis of the Financial Statements. These should be dominated, not only by accountants and financiers, but also by other managers, mainly the general manager; so that you can assess liquidity, operating efficiency, profitability, solvency, and capital structure; among other aspects of a financial nature, as well as the results of the entity as an economic aspect.
Two fundamental methods are applied as analysis tools, which cover five fundamental techniques as detailed below.
- Vertical Analysis Method:
In this vertical analysis method, reference is made to financial information for a single accounting period, exposing the influences of one item on another.
- Procedure of Integral Percents or Component Percentages:
This procedure consists of separating the content of the Financial Statements on the same date or corresponding to the same period, in its elements or integral parts, in order to be able to determine the proportion that each one keeps in relation to the whole. These percentages indicate the relative size of each item included in a total, in relation to the total. Calculating the percentages of several successive years, the items that increase in importance and the least significant can be observed. States in this way are called common size states.
- Reason calculation:
It consists of determining the different dependency relationships that exist by geometrically comparing the figures of two or more concepts that make up the content of the financial statements of a given company.
By reason is understood: The relationship of magnitude that exists between two figures that are compared to each other.
That is to say:
- The arithmetic difference that exists between two figures that are compared to each other or the geometric interdependence that exists between two figures that are compared to each other.
This analysis technique is implicit in the previous techniques used, that is, a ratio is an index, a coefficient. A ratio is a simple mathematical expression of the relationship of one number to another, which is taken as a unit or one hundred percent. They can be expressed in different measurement units (in times, as a percentage, in days, in value).
A reason by itself says something, but when the result is going to be classified as good or bad, favorable or unfavorable, etc., it is necessary to establish comparisons against some relevant standard, in this case the periods covering the year are used. 2007 in relation to 2006.
Technically, it is very easy to obtain a reason, therefore, infinite relationships can be calculated from the Financial Statements as a source of information, classified as follows:
1.2.1 Reasons for Liquidity: Those that study the ability to pay in cash or money of a company, Liquidity is the ability of an entity to meet its debts in the short term, that is, the potential ability to pay its obligations in the short term.
Liquidity determines the ability of the company to meet its payments.
If a company had liquidity problems, it might not be able to meet its debts, leading to suspension of payments.
Considering the liquidity degree of the Current Assets, several indices can be obtained according to the liquidity degree of the items taken for its preparation. Based on this scale, one can speak of four liquidity ratios in a company. Look at each one of them.
LIQUIDITY RATIOS
- Available Liquidity Ratio Immediate Liquidity Ratio Total or General Liquidity Ratio Working Capital
These indices can be used interchangeably according to the characteristics of each company, the objective pursued in a specific job, or the degree of depth desired in the research or analysis being carried out.
The importance of these Liquidity Indices lies in the degree of realization of the various elements of the Current Assets that are taken for their calculation and the degree of enforceability of the Current Liabilities.
- Liquidity Index AVAILABLE
This liquidity, also known as the Treasury Ratio, measures the ability to face short-term debts only from that available to pay. It is calculated as follows:
| Available Current Assets |
| Current Liabilities |
Available current assets include the cash and marketable securities that the company owns, whose high liquidity allows them to be converted into money very easily.
It is difficult to determine adequate limits for this index. A very low value is dangerous because it can lead to problems when having to make payments. On the other hand, a very high value implies having excess cash which is also harmful for the company since it can finally trigger excess Working Capital.
In general, a value around 0.3 can be considered acceptable, although the best index will always correspond to the characteristics of the sector in which the company is located. However, to consider it adequate, it must be approximately 0.5 times.
Like the other liquidity ratios, it is expressed in times or both by one.
- IMMEDIATE Liquidity Index
If the Accounts and Receivables are added to the cash at the Bank and Bank, another liquidity index will be obtained, called the Immediate Liquidity Index, which expresses as its name indicates the immediate capacity of the company to face its debts.
The immediate liquidity, called Acid Test by many authors, measures the ability to face the most demandable obligations, that is, short-term debts, from current assets without the inclusion of less liquid items.
In this case, inventories are not included because they are considered the least liquid in current assets, therefore it indicates the degree to which available and realizable resources can meet short-term obligations.
It is calculated as follows:
| Current Assets - Inventories |
| Current Liabilities |
To consider that the company will not have liquidity problems, this ratio must approximately equal the short-term callable. If the ratio is less than 1, there is a dangerous situation in which you may have trouble meeting your payments. If the ratio exceeds 1, be careful, your investments in available and realizable may be under-utilized.
- Total or General Liquidity Index
Lastly, the total Current Assets can also be used in the numerator and the Total Liquidity Index is obtained. It is the most usual measure of liquidity, it represents the ability to pay in the short term.
General liquidity is the ratio of current assets to current liabilities. It allows to measure the ability of the company to cover its short-term obligations, based on its current assets, at a certain time.
| Current Assets |
| Current Liabilities |
This ratio should reach values greater than 1, although the most appropriate, in general, is that it behave with a value of 2, or almost 2. If the current assets are considerably greater than twice the current liabilities, it is possible that the The company is immobilizing its current assets, and therefore obtain little profitability from them by having an excess of them.
The higher its result, the lower the risk of the company and the greater its solidity of payment in the short term.
The higher this ratio is, the greater the solvency of the company, therefore, the better prepared it is to be able to go through difficult situations without compromising its viability.
This relationship can be expressed sometimes or as much by one.
The analysis of Working Capital is also in the range of this ratio.
1.2.2 Net Working Capital: It is the difference between the assets and current liabilities of a company. It allows the company to measure its liquidity, for this reason it must be positive, thus ensuring that the Current Assets are greater than the Current Liabilities, which means that the company has the financial means to pay its short-term obligations.
| Current Assets - Current Liabilities |
1.2.3 Activity Reasons: They are those that measure the efficiency of accounts receivable and payable, the efficiency of materials consumption, production, sales and assets.
The Indices or Ratios of Rotation, as its name indicates, allow analyzing the rotation cycle of the selected economic element. The result of these indices is usually expressed in days.
Within these Rotation Ratios are:
- Asset Rotation Ratios Collection Cycle Rotation Ratio Payments Cycle Rotation Ratio Inventory Rotation Ratio Maturity Cycle or Maturation Period of the Company TOTAL ASSETS Rotation Index
This index is based on the comparison of the amount of the Sales with the total of the Total Net Assets. Every asset requires a liability to finance it. For these reasons, the objective is to try to maximize Sales or Income with the minimum of Assets, which in turn translates into less Liabilities and therefore there will be less debts and less Equity will be needed. All this finally translates into a more efficient company.
This ratio allows to establish the frequency of rotation of the total assets that the company has used during a certain time, that is, the average investment. Like the previous one, higher turnover reflects more favorable behavior.
| Net sales |
| Total Net Assets |
The higher the value of this ratio, the better will be the productivity of Total Net Assets, that is, the money invested in this type of Asset rotates a greater number of times, which translates into greater profitability for the business.
- Current Assets Rotation Index
As a complement to the rotation of working capital, the rotation of current assets can be determined. These rotations can be established using net sales and total cost (cost of sales and operating expenses). This allows us to carry out a more meaningful analysis.
This index is based on the comparison of the amount of the Sales with the total Current Assets. Every asset requires a liability to finance it. For these reasons, the objective is to try to maximize Sales or Income with the minimum of Assets, which in turn translates into less Liabilities and therefore there will be less debts and less Equity will be needed. All this finally translates into a more efficient company.
| Sales |
| Current Assets |
The higher the value of this ratio, the better will be the productivity of the Current Assets, that is, the money invested in this type of Asset rotates a greater number of times, which translates into a higher profitability of the business.
- Fixed Asset Rotation Index
This index is based on the comparison of the amount of the Sales with the total of the Net Fixed Assets. Every asset requires a liability to finance it. For these reasons, the objective is to try to maximize Sales or Income with the minimum of Assets, which in turn translates into less Liabilities and therefore there will be less debts and less Equity will be needed. All this finally translates into a more efficient company.
This ratio allows the frequency of rotation of tangible fixed assets that, on average, the company has used during a given time to be established. The higher the rotation, the more favorable it is. The type of company must be taken into account, hence in an entity where assets of this nature occupy a large weight within total assets, this ratio is more significant.
| Sales |
| Net Fixed Assets |
The higher the value of this ratio, the better the productivity of the Net Fixed Assets, that is, the money invested in this type of Asset rotates a greater number of times, which translates into greater profitability for the business.
- Working Capital Rotation Index
This index is based on the comparison of the amount of the Sales with the total Working Capital. All working capital requires liabilities to finance it. For these reasons, the objective is to try to maximize Sales or Income with the minimum of Assets, which in turn translates into less Liabilities and therefore there will be less debts and less Equity will be needed. All this finally translates into a more efficient company.
It has been previously established that Working Capital is the consequence of holding cash, loans to customers, inventory inventories, prepayments and other items of current assets, as well as the presence of short-term debts. Hence, a growth in sales must correspond to the increase in working capital.
To verify if the sales-working capital ratio is proportional, if it improves or deteriorates, we can calculate the rotation of working capital, it is determined as follows:
| Net sales |
| Working Capital |
where: Working Capital = Current Assets - Current Liabilities
The higher the value of this ratio, the better the productivity of Working Capital, that is, the money invested in this type of Asset rotates a greater number of times, which translates into greater profitability of the business.
In working capital turnover, an increase in the ratio may be caused by a poor decision in financial matters.
- Accounts Receivable Rotation: Allows to know the number of times the Company's average number of customers is renewed, the number of times the commercial circle is completed in the period to which net sales refers. It is necessary to know the cycle that the company has to carry out the analysis.
The balances of the commercial accounts and receivables express the value of the investment made in the clients, they represent the amounts for the sales that have not yet been collected on the closing date of the accounting information.
| Net sales |
| Average Accounts Receivable |
The average customer balance is calculated in the same way as the average inventories, adding the amounts of this balance sheet item at the end of the previous year and this year, and dividing the sum by two.
Keep in mind that the important thing is not just to sell, but you have to collect those sales. It is frequent the case of companies that have disappeared due to greatly increasing their sales and taking time to collect them.
Do not forget that any asset item has a financing cost, so a high amount of clients implies a significant cost for the company.
Therefore, the shorter the payment term of the clients, the lower the cost of their financing.
- Collection Cycle
It shows the average in days of the Collection Cycles of a company.
It is important for the company to measure this cycle with the aim of evaluating compliance with the customer credit policy and the behavior of collection management. This ratio expresses the average number of days that the entity has taken to collect its accounts for sales of merchandise and services.
Its calculation is carried out as follows:
| Commercial Accounts and Receivables x Time Interval |
| Net Credit Sales |
Commercial accounts and receivables must be averaged in order to streamline such items taken from the balance sheet. The balances at the beginning and end of the period are added and divided by two, thus determining the amount that is placed in the numerator of the ratio.
The Variable "Time Interval" will take the corresponding value according to the period of time for which they are being calculated, that is, if the analysis is carried out with the figures of one month, it is multiplied by 30 days, if it were one year 360 days and so as appropriate.
In general, every company wants the Collection cycle to be as short as possible, while the Payment cycle should be as high as possible in order to maintain its sources of financing.
The result of these indicators is influenced by the company's collection and payment policy. Hence the commercial strategies for applying discounts and credits so that they respond to the objectives set by the company.
In those companies where the movement of the Accounts and Receivables is significant, it is advisable to work the numerator of these indices on the basis of averages instead of static figures so that the result shows the average situation and not the specific situation of a moment. determined.
The lower the value of this ratio, the shorter the collection cycle.
- Accounts Payable Rotation: Indicates the number of times the average of accounts payable to suppliers is renewed in the period or year to which the net purchases refer. It allows to know the speed or efficiency of payments of the Company. As in the previous one, it is necessary to know the payment cycle that the company has to carry out the analysis.
The accounts and bills payable express the value of the financing that through commercial credit is pending to be paid to the suppliers on the closing date of the accounting information.
| Net purchases |
| Average Accounts Payable |
The situation here is just the opposite of the previous case: Suppliers are a source of financing (they finance raw materials and products purchased), usually cheaper than others, so the longer it takes to pay them, the higher their balance will be. and, therefore, the company will benefit to a greater extent from this financing.
However, the delay in payment has a limit:
On the one hand, a delay in payment to suppliers may be an indication that the company has liquidity problems that lead to delayed payments.
- On the other hand, an excessive delay in the payment to suppliers could lead them to stop supplying the company. Payment Cycle
It shows the average in days of the Payment Cycles of a company.
It is also important to measure the payment cycle with the aim of evaluating the fulfillment of the obligations contracted with this type of creditor. This ratio expresses the average number of days that the company has taken to pay its bills for purchases from suppliers.
Its calculation is carried out as follows:
| Commercial Accounts and Payables x Time Interval |
| Purchases on Period Credit |
The commercial accounts and bills payable must be averaged in order to streamline such items taken from the balance sheet. To calculate the average, proceed in the same way as in the collection cycle ratio, using accounts and bills payable.
The Variable "Time Interval" will take the corresponding value according to the period of time for which they are being calculated, that is, if the analysis is carried out with the figures of one month, it is multiplied by 30 days, if it were one year 360 days and so as appropriate.
In general, every company wants the Collection cycle to be as short as possible, while the Payment cycle should be as high as possible in order to maintain its sources of financing.
The result of these indicators is influenced by the company's collection and payment policy. Hence the commercial strategies for applying discounts and credits so that they respond to the objectives set by the company.
In those companies where the movement of Accounts and Payables is significant, it is advisable to work the numerator of these indices on the basis of averages instead of static figures so that the result shows the average situation and not the specific situation of a moment determined.
The lower the values of these ratios, the lower the collection and payment cycles.
- Inventory Rotation: They indicate the speed of the Company in making its sales, the speed of consumption of materials or raw materials and the speed of production. Commodity Inventory Cycle
| Commodity Inventory x Time Interval |
| Material Consumption |
The higher this ratio, the more effectively the company manages its stocks. It should not be forgotten that stocks have a financing cost, so the faster they rotate, the tighter the stock to be financed will be.
- Inventory of Products in Process Cycle
| Inventory of Products in Process x Time Interval |
| Total Production Cost |
- Finished Products Inventory Cycle
| Finished Products Inventory x Time Interval |
| Mercantile Production Cost |
An excessively low warehouse involves the risk that the company receives an order from a customer and is not able to fulfill it quickly enough, losing the order and, probably, the customer.
In general, in these indices, Average Inventories are used as a numerator in order that the index reflects the average behavior and not the situation at a certain moment that may not be representative of the company's management.
The lower the result of these ratios, the greater the efficiency in the use of this resource, since it will indicate that they remain immobilized for less time.
1.2.5 Debt Reasons: It allows to measure the proportion of the total Assets contributed by the Company's creditors, the higher this index the greater the amount of money from other people that the entity is using. This ratio should not be greater than 50%.
From knowing to what extent the different sources of financing help finance the different Assets, it is necessary to also know how the company's sources of financing are structured. In other words, the relationship between the External Resources, the Permanent Resources and the Company's Own Resources. These indices allow diagnosing the structure of the company's debt.
There are several debt indices, among which are:
- Debt Ratios Debt Quality Ratio Autonomy Ratio Debt Index
This index measures the intensity of all the company's debt in relation to its Own Funds. The use of foreign capital in the financing of investments by companies is a normal practice. However, the excessive use of external financing creates a great risk, hence the need to assess whether the debt levels are adequate.
| Totally passive |
| Heritage |
For this reason, external financing is related to their own. It can be expressed in times or both by one, and if the quotient is multiplied by 100, it is expressed as a percentage.
The lower its value, the lower the degree of indebtedness, reflecting in a stability for the entity. This low degree of indebtedness enables the company to access new sources of financing. A value between 0.5 and 1.5 can be considered acceptable. If it is greater than 1.5 it is worrying and if it goes beyond 2 there is excess indebtedness.
- Total Indebtedness Index
This index reflects the degree of financial dependence or independence of the company.
When considering the Liability plus Equity in the denominator, this index expresses the proportion of Total Resources corresponding to obligations, that is, they are External Resources.
| Totally passive |
| Liabilities + Equity |
The higher the value, the greater the dependence on External Resources to finance itself and the greater risk. This situation can even lead to part of the Fixed Assets being financed with the Liabilities and therefore negatively affect the Solvency of the company
The lower the value, the greater the financial independence, which means that the company finances itself with its own resources. This situation presents less risk, it is safer, but sometimes it can even affect the profitability of the company. This can even lead to high solvency. But a very high value can imply excess resources and consequently affect profitability.
- Debt Quality Index
Debts are always a risk, but undoubtedly, those that mature earlier are more worrisome. Sometimes companies borrow too much in the short term to finance long-term investments.
This index allows knowing the total debt that part of it corresponds to short-term debts.
| Current Liabilities |
| Totally passive |
There are no pronouncements regarding the limits of this index, but without a doubt, the lower the value, the higher the quality of the debt, since the greatest weight of the debt falls on the Long-Term Obligations, which have a more distant maturity and allow the company to be able to finance itself in a more stable way.
The expression of this relationship can be as a percentage and as a percentage.
1.2.6 Profitability Ratios: It allows evaluating the Company's earnings with respect to a given level of sales, Assets or Capital. These ratios relate the benefits to various magnitudes and measure the profitability of the company. You have to analyze the evolution of the profitability ratios and see how to compare with those of the competition.
- They cover the set of ratios that compare the earnings of a period with certain items of the Statement of Income and Situation.Their results materialize the efficiency in the management of the company, that is, the way in which the managers have used the resources of the business. For these reasons, the entity's management must ensure the behavior of these indices, because the higher their results, the greater the prosperity for the company.The criteria as to which Utility to select for the calculation of these indices are very varied. There are authors who use Profit Before Tax claiming that this item reflects what the company has generated and therefore its comparison is more real.There are others who take Profit After Taxes as the one that reflects what was left in the company and therefore its use shows more consistent results. There are those who use one or another Utility according to the index to calculate. For this work, the concept of Net Income for the Period will be used as Variant 1 and as Variant 2, the most common way that many authors work these indices will be exposed, either using Profit Before Taxes or After Taxes according to the index.For this work, the concept of Net Income for the Period will be used as Variant 1 and as Variant 2, the most common way that many authors work these indices will be exposed, either using Profit Before Taxes or After Taxes according to the index.For this work, the concept of Net Income for the Period will be used as Variant 1 and as Variant 2, the most common way that many authors work these indices will be exposed, either using Profit Before Taxes or After Taxes according to the index.
Profitability Ratios
- Total Asset Ratio Income Profit Ratio or Net Margin Ratio Economic Profitability Ratio Financial Profitability Ratio Financial Leverage Ratio Total Asset Ratio: Indicates the efficiency with which the entity can use its Assets to generate sales, the higher this rotation will indicate that the Asset has been used efficiently.
| Net sales |
| Total active |
This ratio relates the profit obtained by the company to the size of its balance sheet. It measures whether the increasing size of the company is accompanied by the maintenance of its profitability levels or if, on the contrary, this growth is implying a progressive deterioration in its profitability levels.
- Net Margin or Income Profitability Index
Profitability on sales is an important reason that allows us to know the percentage of profits achieved in relation to the amount of net sales. It can be determined using different levels of earnings, as reflected in the income statements converted to common size.
It indicates how much profit has been obtained for each peso of Sales, in other words how much the company earns for each peso it sells.
Its calculation is presented as follows:
| Net Income for the Period |
| Net sales |
The higher the result of this indicator, the better it will be for the company, the more efficient sales management has been.
This index allows knowing the behavior of the profits generated by the business in relation to net sales. It can be expressed as a percentage, or as a percentage.
- Economic Profitability Index
The economic profitability ratio is of great importance, which is why many authors consider it the queen of reasons, and it is because it manages to summarize, to a large extent, the effect of the profits generated by the business on the entire investment used by the company over a period of time; that's why many call it the return on investment.
This indicator shows the Profit that is obtained for each weight of Total Assets invested. It provides the level of management efficiency or what is the same as the level of return on investments made. It shows how much the enrichment of the company increased as a product of the profit obtained.
| Net Income for the Period |
| Total active |
The higher its value, the better it will be for the company, since its results will reflect how much the entity's Assets have been productive.
- Financial Profitability Index
Financial profitability, like economic profitability, is a ratio that reflects the effect of the behavior of different factors; it shows the return extracted to own capital, that is, the capital contributed by owners and, unlike the return on assets, uses net profit.
Net income is impacted not only by the results generated in the business, but also by the interest accrued on medium and long-term debts contracted by the company, as well as taxes on taxable profits.
This index shows the Profit obtained for each peso of Own Resources invested, that is, how much money has been generated by the Capital contributed by the owners of a company.
The procedure to calculate the financial return is as follows:
| Net Income for the Period |
| Heritage |
The final objective of every entity should be aimed at increasing its Financial Profitability as the maximum indicator in which the effects of good business management materialize. But for this, it is necessary to work from the base of the pyramid, monitoring the behavior of the ratios that support it. Achieve your strengths and that your results reach the permissible limits.
This can only be achieved by constantly interacting at the production and sales levels. Above all, carry out management work with a view to increasing the volume of Sales or Income as a primary element. Sales affect the behavior of many ratios. Through them, the Asset Rotation and the Net Margin Index are calculated. Hence the importance of constant vigilance regarding its volumes and trends. You must be able to sell more but with the minimum of the resources invested in both Assets and Capital. Sales play a key role in a company, so they must occupy an important place within the work objectives of the organization.
- Financial appeceament
Financial Leverage in a company is a very useful tool since it allows evaluating the relationship between debt and the Company's Equity. In other words, Financial Leverage is nothing more than the economic strategy of a company.
| Active |
| Heritage |
The leverage factor is positive when Financial Profitability is greater than Economic profitability, at higher indebtedness, and when economic profitability is greater than the interest rate, the return on equity increases. The leverage factor is negative when the financial return is less than the economic return, when the economic return is less than the interest rate, the higher the indebtedness, the lower the return on equity.
Financial Analysis of the Cárnica Las Tunas Company
The Financial Analysis shown, was carried out based on the Financial Statements presented by the Cárnica Las Tunas Company at the end of the first quarter of 2007 and the same stage in 2006, for which we used the Statement of Situation or Balance Sheet and Income Statement, applying for it the different established analysis techniques.
FINANCIAL REASONS
I Trim. 2007 I Trim. 2006
General Liquidity = AC = 8495.5 7243.2
PC 4153.2 2961.4
= 2.0 pesos 2.4 pesos
In both years, the Company has enough liquidity to face its short-term debts at a given moment, owning 2.0 and 2.4 pesos of Current Assets respectively for each peso of Current Liabilities, which shows that it has solidity although it shows a tendency to decrease by 0.4 pesos in relation to the same period in 2006. Including in this situation the large increase in Other Current Liabilities (142.9%), even though Other Current Assets and Accounts Receivable also increased. See Annexes 1 and 3.
I Trim. 2007 I Trim. 2006
Immediate Liquidity = AC - INV 8495.5 - 1618.6 7243.2 - 1984.5
PC 4153.2 2961.4
= 1.7 times 1.8 times
When analyzing the results obtained, it is evident that the entity has sufficient capacity to face the most demandable debts without the inclusion of its least liquid assets, even though it decreases 0.1 times in relation to the previous period. On the other hand, it must keep vigilance of the situation since the quality of this liquidity is supported in a high percentage in the Other Current Assets (Debts to be received from the State Budget) while the tendency of cash has been to decrease not in the same proportion in which their accounts receivable have increased, while Other Current Liabilities grew considerably. See Annex 3.
Analysis of the quality of Working Capital
Collection cycle = Commercial accounts and receivables x days of the period
Sales
I Trim. 2007 I Trim. 2006
Collection cycle = 1531.7 x 90 1152.4 x 90
7532.1 10754.1
Collection cycle = 18 days = 9.6 days
The collection cycle has deteriorated considerably compared to the previous year, reaching almost double, which shows poor collection management even when the value of its sales has decreased significantly.
See Annexes 1 and 2
Payment Cycle = Commercial accounts and bills payable x days of the period
Credit Purchases
I Trim. 2007 I Trim. 2006
Payment cycle = 2395.5 x 90 = 2236.2 x 90
4374.0 10351.6
Payment cycle = 49.28 days = 19.44 days
The payment cycle increases significantly due to the fact that the primary documentation does not arrive in time and form, the product arrives covered by conducts, delaying the invoice for up to 3 months in the Meat Union, also influencing the decrease in purchases for the due period to the suspension of imports due to country strategies. It is also influenced by poor collection management and the non-receipt in time of subsidies for differences in product prices. The average number of days of payment for this type of entity is unknown. See Annex 1.
I Trim. 2007 I Trim. 2006
Availability = Cash 1770.7 2475.7
PC 4153.2 2961.4
= 0.43 pesos 0.84 pesos
In 2007, 43 cents are available for each peso of short-term debt and 84 cents in 2006, influenced by the decrease in sales and poor collection management, as well as the non-receipt in time of the difference subsidy in product prices, which has an unfavorable impact in this regard.
Operations Cycle
I Quarter 2007
19.1 days 18.0 days
49.2 days -12.2 days
The cash cycle is negative, reaching –12.2 days due to the increase in the average number of days to make payments, this is due to the fact that merchandise such as chicken, pallets and pork legs are being received through the company and the Billing by the corresponding provider is delaying, reaching 3 to 5 months, which is seriously affecting the payment of the same.
Working Capital = Current Assets - Current Liabilities
I Trim. 2007 I Trim. 2006
CT = 8495.5 - 4153.2 7243.2 - 2961.4
CT = 4342.3 pesos 4281.8 pesos
In %
I Trim. 2007 I Trim. 2006 Deviation
Current Assets
. Cash on hand and Bank 21 34 -13
. Accounts and Receivables 18 16 2
. Inventories 19 27 -8
. Other Current Assets 42 23 19
Total 100 100 0
Current Liabilities
. Accounts Payable 58 76 -18
. Other Current Liabilities 42 24 18
Total 100 100 0
When analyzing the Working Capital, it can be seen that its quality decreases if we compare it with the same period in 2006, with tendencies to decrease its more liquid items (cash) and increase Accounts Receivable and Other Current Liabilities, even when it decreases considerably the least liquid of your AC (inventories). This is due to the fact that the company has to disburse cash every ten days to the Pig Company for the purchase of the differentiated pig, a strategy that the country has taken to guarantee the supply at a lower price to the population and stimulate the production of the peasantry, In addition, there has been a delay in receiving subsidies for price differences to products of the State Budget, together with the decrease in collection management. See Annex 1.
I Trim. 2007 I Trim. 2006
Capital Rotation = Net Sales 7532.1 10754.1
Working Capital 4342.3 4281.8
= 1.73 pesos 2.50 pesos
As can be seen in I Trim. In 2006, for each peso of Working Capital, 2.50 pesos of sales were generated, while for the same stage of 2007, only 1.73 pesos were generated, denoting the effect of the decrease in sales (30%) in the TC, even when this last increased. See Annex 5.
I Trim. 2007 I Trim. 2006
Rotation = Net Sales 7532.1 10754.1
Inventories Inventories 1618.6 1984.5
= 4.65 times 5.4 times
I Trim. 2007 I Trim. 2006
Asset Rotation = Net Sales 7532.1 10754.1
Fixed Net Fixed Assets 4632.0 4939.5
= 1.6 times 2.2 times
I Trim. 2007 I Trim. 2006
Asset Rotation = Net Sales 7532.1 10754.1
Current Assets Current Assets 8495.5 7243.2
RAC = 0.9 times 1.48 times
I Trim. 2007 I Trim. 2006
Total Asset Rotation = Net Sales 7532.1 10754.1
Total Assets 13,608.5 12,480.3
RAT = 0.55 times 0.86 times
It can be seen that there is a tendency to decrease the turnover of Inventories, Fixed Assets, Current Assets and Total Assets, which implies that the money invested in these assets has yielded a smaller number of times, leaving less contribution to profit and affecting the effectiveness of company operations. See Annexes 3 and 5.
I Trim. 2007 I Trim. 2006
Profitability of sales U.AII 1430.0 3352.6
o Margin on sales = Sales 7532.1 10754.1
= 0.19 pesos 0.31 pesos
The profit for each peso of sales in 2007 decreased by 12 cents if we compare with the same period in 2006, a result that was decisively influenced by the increase in cost of sales for the First Quarter. 2007, particularly given by the increase in the price of materials consumed, as well as in direct labor. See Annexes 5 and 6.
Economic profitability = UAII x Sales
Active Sales
I Trim. 2007 I Trim. 2006
= 1430.0 x 7532.1 = 3352.6 x 10754.1
7532.1 13608.5 10754.1 12480.0
= 0.19 x 0.55 = 0.31 x 0.86
= 0.105 or 10.5% = 0.269 or 26.9%
In 2006 Profits before Interest and Taxes represent 26.9% of the invested assets and in 2007 10.5% for a variation of 16.4%, negatively affecting the increase in cost of sales, as well as the poor performance obtained from assets in relation to sales made, which has an unfavorable impact on Working Capital since they are current assets that are not received by the entity, with almost the same values in total assets as in the previous period and even more when they grew, so which should have obtained greater profitability, also taking into account that it will not have the expected means to meet its obligations.
Consecutive substitution
UAII x Sales = UAII
Active Sales Assets
I - 0.19 x 0.55 = 0.105
II - 0.31 x 0.55 = 0.170
III- 0.31 x 0.86 = 0.269
Deviations:
III-II
0.269 - 0.170 = 0.099
II-I
0.170 - 0.105 = 0.065
----–
0.164
========
By analyzing in detail the causes of the effect of this variation, it was possible to determine that the decrease in sales implicitly increasing the cost of material consumption and direct labor (fundamentally) negatively affected the return on assets by 9.9%, while that the decrease in the margin on sales influenced 6.5%.
Financial Profitability = Net Income x Sales x Assets
Capital Assets Sales
Year 2007 Year 2006
RF = 929.5 x 7532.1 x 13608.5 RF = 2179.2 x 10754.1 x 12480.3
7532.1 13608.5 9419.0 10754.1 12480.3 9420.8
RF = 0.12 x 0.55 x 1.44 RF = 0.20 x 0.86 x 1.32
RF = 0.09 pesos RF = 0.23 pesos
The Net Income obtained in operations from the entity's equity is quite low, 9 cents for each peso of equity, while during the same period of 2006 23 cents were obtained, for a decrease of 14 cents per peso of invested equity.
Consecutive Substitution Technique:
-
- Calculation of net profit considering the structure of profit in the base period:
| 10,754.1 | X | 0.202 | = | 2,179.2 |
2. Calculation of net profit considering net sales calculated by a decrease in prices of 5%:
| 10,754.1 | X | 0.95 | = | 10216.4 |
| 10,216.4 | X | 0.202 | = | 2070.2 |
3. Calculation of the net profit considering the sales of the current year and the net structure of the base period:
| 7,532.1 | X | 0.202 | = | 1,526.2 |
4. Calculation of the net profit considering the net sales of the current year and its structure:
| 7,532.1 | X | 0.123 | = | 929.5 |
Determination of Differences:
D 1 = 2070.2 - 2179.2 = (109.0)
D 2 = 1526.3 - 2070.2 = (543.9)
D 3 = 929.5 - 1526.2 = (596.7)
TOTAL… (1249.6)
Proving:
RF 2007 RF 2006 Difference
0.09 0.23 0.14
= 0.14 x 9419
Approximately = 1249.6
As can be seen as a result of the application of the chain substitution method, it reflects that the effect on profit in this year compared to the previous year is affected by 109.0 thousand pesos due to the decrease in sales prices, due to the The decrease in sales is affected by 543.9 thousand pesos and the decrease in the margin on sales is affected by 596.7 thousand pesos.
I Trim. 2007 I Trim. 2006
Financial Return = UAII 1430.0 3352.6
Total Liabilities 4,189.5 3,059.6
= 34.1% 109.5%
As can be seen, 2006 is highly profitable and 2007 is profitable, although it denotes a significant decrease.
GENERAL CONCLUSIONS
After having carried out the analyzes, we reached the following conclusions:
- When analyzing the Working Capital, it was found that it does not have a significant growth in 2007 compared to 2006. Although the liquidity index is favorable, it has a negative influence given by the State Budget Debts that represent 26.3% of total Current Assets. The entity's profit is significantly affected by the increase in cost of sales. The decrease in sales (30%) decisively influenced the performance of Working Capital.
recommendations
- Carry out the necessary steps to make the State Budget Debts effective. Carry out an exhaustive analysis of the cost of sales to identify the causes of their increase. Carry out an analysis of sales to identify the causes that negatively affect compliance. Process with the Meat Union the immediate shipment of invoices once the product is received.
