Interpret, analyze, draw conclusions, examine the situation and historical behavior of companies.
It establishes the causes and consequences projected over time.
Work on the past-present-future relationship.
financial-analysis-and-its-toolsKNOWLEDGE
• Outstanding analytical skills and research skills.
• Knowledge of general accounting and costs.
• Financial information of the company.
• Know labor aspects, products and market, production process.
KNOWLEDGE
• Know the installed capacity, plans and projections.
• Aware of situations and changes in the economic, political, monetary and fiscal fields, both nationally and internationally.
• Reach a logical conclusion.
• Asset level appropriate to the volume of operations.
• Sufficient working capital to attend operations.
• Excessive installed capacity, sufficient for its future, will require new investments, an adequate technological level.
• The company creates funds to grow or is financed with external resources.
• Competition, trends, substitute products.
• Labor and tax provisions that affect it.
• As it finances the asset, it has an adequate capital structure.
• You will be able to pay your current liabilities.
• You can meet your long-term obligations.
• The contribution of the partners and the volume of liabilities with third parties are provided.
• Acceptable rates of return and their trend are being obtained.
TOOLS
• Basic financial statements for the last two years and their notes.
• Complementary information on the structure of fixed and variable costs, form of payment of its liabilities and depreciation method.
• Sector information. Macroeconomic analysis.
VERTICAL ANALYSIS
• It involves taking a single financial statement and relate each of the parties with a certain total within the same state figure called base.
• It is static, it does not know changes over time.
• It is the% participation of an account.
HORIZONTAL ANALYSIS
• Presents individual changes from period to period and requires at least two financial statements.
• It is a dynamic analysis because it deals with change over time.
• Determine the significant variations and figures of special attention.
• Accounts receivable: originated by an increase or decrease in sales, terms, collections, discounts, etc…
• Inventories: If it is by quantity or price increase, due to expectations of increases; in finished evaluating the market.
• Fixed assets: Justified the expansion in plant according to the market.
• Current liabilities: Variations in financing policies, changes in bank obligations due to rates, increase in suppliers due to volumes, increase in
prices or changes in supplier policies.
• Labor Liabilities: Changes in accumulated layoffs, benefits, pensions, personnel and conventions.
• Sales: Variation in volume, price and lines with significant variations.
• Cost of Sales: Relationship to sales.
• Sales expenses: Also related to sales.
• Administration Expenses: They must be evaluated independently of sales.
REASONS OR INDICATORS
• Reason: Numerical relationship between two quantities with logical sense; different balance sheet and P&G accounts.
• Points out the weak and strong points of a company and indicates probabilities and trends.
• Select reasons that can be used.
Cold Reason Standards
• From the Analyst at your discretion and experience.
• Reasons or indicators of the company in previous years.
• Indicators based on budgets or goals.
• Industry average indicators.
LIQUIDITY INDICATORS
• It measures the ability of the company to cancel its CP obligations.
• The ease or difficulty to pay its liabilities. with its assets ctes.
• Evaluates the company from its liquidation.
• We must analyze the quality of the ctes assets and their convertibility to cash.
Current Ratio
• Current assets / current liabilities
• Evaluate all assets become effective by the carrying value of the company.
• This indicator the higher the better and can be considered good from one (1).
Acid Test
• Current Assets-Inventories / liabilities cte
• It is known as Acid Test, it is more rigorous, it measures the company's capacity without the sale of its inventories.
• Shows your actual cash balances.
• There are inventories that can be sold quickly.
• The indicator must be equal to one (1).
Liquidity of current assets
• Cash and temporary investments 100%
• Accounts receivable 70%
• Inventories 50%
• Sundry debtors 5%
• Depending on the type of assets, they could be taken as bases for the measurement of real liquidity.
Net Working Capital
• Current Assets - Current Liabilities
• This indicator must be positive.
• Indicates the surplus value of the company after paying its liabilities with its assets ctes.
• If this indicator is negative, it means that the company must renew its current liabilities and there are risks.
DEBT INDICATORS
• Measure the degree and manner in which creditors participate in the company.
• Measure the risk of creditors and owners.
• Depends on profitability variables, interest rates.
• The return on the asset must be higher than the average cost of capital.
Indebtedness Level
• Total liabilities / Total assets
• It is the% that for each peso of assets has been financed with creditors.
• Analysts believe that this level should not exceed 50% and in the case of Colombia, 60% is considered normal.
• We must analyze true equity accounts (cash).
Short-term
indebtedness • Current Liabilities / Total Liabilities
• It is the percentage of maturities in less than a year.
• The type of company should be reviewed.
• Manufacturers are balanced in the short and long term.
• Commercials tend to focus on the short term.
Interest Coverage
• Operating profit / financial expenses
• The aim is to establish the incidence of financial expenses in the results.
• The higher this indicator is, the better.
• The relationship between interest paid and liabilities with costs must be established.
Leverage
• Total Liabilities / Equity
• Measures which of the two parties runs the greatest risk to creditors or owners.
• It measures the degree of commitment of the patrimony towards the creditors.
• It is said that the ideal leverage should be one (1).
• Up to 2.33
ACTIVITY INDICATORS are considered acceptable today
• Rotation calls.
• They measure the efficiency in the use of assets, according to speed and recovery.
• It is not convenient to keep unproductive or unnecessary assets.
• Purpose to produce the highest results with a minimum investment by controlling the rotation of assets.
Portfolio Rotation
• Credit sales / ctas x receivable av..
• It indicates how many times in a period the accounts receivable revolved.
• You can work with the total sales and the total accounts receivable. Under these parameters, a more agile rotation than the real one is obtained.
• It should be compared with related companies
Average Collection Period
• Avg CxC. X 365 days / credit sales
• How long it takes in days to recover portfolio.
• Compare with related companies.
• If the E / F are cut to quarters, the number of days elapsed must be taken.
• Compare the company policy and the result.
• For industrial companies, these are the raw materials, materials and manufacturing costs at each production stage. The basic inventories are raw materials, products in process and finished products.
• For commercials, they are the cost of the goods in their possession.
• Commercial Companies
• Cost of sales / average inventory Result # of times of rotation
• Average Inventory x 365 / Cost of sales Result # of days of rotation
• Compare with related companies, cost of maintenance, durability of products, location of suppliers and fashion and style.
• Industrial Companies
• Cost of sales / average inventories
• Cost of PM / Inventory of MP
• Cost of production / Inv.. Prod.. Process
• Inventory x 365 / production costs. It should be compared with related companies, location, production days, etc.
Rotation of Fixed Assets
• Sales / gross fixed assets
• In pesos not on productivity.
• It does not allow to measure if it uses its installed capacity.
• The sale or acquisition of fixed assets affects the turnover rate.
• It must be compared with related companies.
Supplier Rotation
• CxP x 365 / Credit purchases
• Portfolio rotation must be evaluated to determine the need for a longer term for its suppliers; as well as the rotation of its raw materials in industrial companies.
• Evaluate related companies.
PERFORMANCE INDICES
• Called profitability.
• They measure the efficiency of the administration controlling costs and expenses to generate profits.
• For shareholders, the most important thing is the way in which the values invested in the company return (return on equity and assets).
Margins
• Gross: Gross profit / sales
• Operational: Operating profit / sales
• Net: Net profit / sales. We will evaluate if the companies profit is given by their operation or from other different income; the behavior of margins historically.
Returns
• Equity: Net profit / equity
• Assets: Net profit / total assets. Evaluating total gross assets without discounting depreciation, or inventories and debtors provisions.
• The return on equity is not equal to that of the shareholder if the profits are not fully distributed.
Dupont System
• Relates activity indicators to performance indicators to determine if profitability comes from efficiency in the use of resources to produce sales or from the net profit margin of the sales themselves.
• (Net profit / sales) x (Sales / Total assets)
INTERNAL GENERATION
• Net profit plus the items charged to the profit and loss statement and that does not imply actual cash outflow in the period such as depreciation, depletion, deferred amortization, provisions for severance, retirement and income tax are included.
Four C's of Credit
• 1. Character: Provably good and demonstrated managerial ability.
• 2. Capital: Equity strength and comparative leverage with the sector
• 3. Payment capacity: Based on historical ability to pay, projections and their figures, cash flow.
• 4. Debt capacity.
Strategic Vision
• Diagnosis and forecast of the environment: Detect threats and opportunities.
• Mission: Business LP Objectives.
• Analysis of strengths and weaknesses.
• Planning and implementation of a strategy to fulfill the mission, taking advantage of strengths and overcoming weaknesses.
Increase in sales
• Total increase / Increase in prices = Increase in Volume- 1
• Ex: Increase in sales 68% and prices 30% = 1.68 / 1.30 = 1.29-1 = 29%
• Total increase / Increase in volume = Increase in prices -one
• Ex: Increase in sales 68% and volume 29% = 1.68 / 1.29 = 1.30-1 = 30%
10 reasons not to increase credit risk
• 1- Maintain superficial knowledge of the client
• 2- Do not confirm information or insufficient financial information without comparison with the fiscal balance.
• 3- Weak analysis without focus.
• 4- Poor knowledge of the sector.
• 5- Poor risk identification
10 reasons not to increase credit risk
• 6- Poor LME structure: Purpose and not customer need.
• 7- Poor knowledge and handling of guarantees.
• 8- Poor patrol or monitoring.
• 9- Eagerness, haste, accelerate.
• 10- Maintain a poor control “C”.
CASH FLOW
• Known as:
• State of Sources and Uses of Funds • State of Origin and Application of Funds.
• Statement of Changes in Financial Position.
• State of Origin and Application of Resources.
FLOW OF FUNDS
• It is an auxiliary financial statement that compares the balance sheet on two determined dates.
• Deduce where you got the financial resources from and where you went.
• Assets represent net uses of funds; liabilities and equity represent sources in a starting business.
Basic sources of funds
• Profit.
• Depreciation and charges (deferred amortizations and provisions) to the P&G that do not represent a cash outflow.
• The capital increase.
• The increase in liabilities.
• Decrease in assets
Use of funds
• Increase in assets.
• Decrease in liabilities.
• Net losses.
• Payment of dividends or distribution of profits.
• Re-acquisition of shares.
Examples of uses and sources
• year1 year2 Varia. Clasi
• Cash 22 30 +8 Use
CASH FLOW
• The only secure and reliable financial statement that shows the true situation of a company to its partners and creditors.
• Cash flow enables a project to be clearly evaluated and appropriate techniques such as the IRR or VPN to be applied to assess the probable profitability and viability of the business.
CASH FLOW
• It serves to rethink the financial scheme of a company with financial problems to assess its continuity or liquidation.
• Presents cash inflows and outflows, evaluates the ability to generate future flows, anticipates cash needs and their adequate and timely coverage, plans investments with surpluses, evaluates new investments and distributes profits.
CASH FLOW
• In Colombia, according to Decree 2649 of 1993, it is considered one of the basic financial statements that companies must present at the end of each accounting period, together with the Balance Sheet, the Income Statement, the
Statement of Changes in the Financial Situation
(Flow of funds) and the Statement of Changes in Equity.51
Differences between Cash Flow and Cash
Flow Cash Flow
Works with "resources" that can include raw materials, portfolio, etc.
It is generally presented by the indirect method and considers depreciations, etc., as sources.
Cash Flow Direct Method
• Each item of the income statement should be reviewed to define the inflows and outflows of cash and the initial balance with the end to determine which present cash inflows or outflows.
FREE CASH FLOW
• Separate the operation from the financing. Operational Flow: Operating profit + depreciation and amortizations are sufficient to meet the needs of working capital and fixed assets. Look for non-operational sources and uses such as financial, partner. Other income, other assets or other liabilities.
FREE CASH FLOW
• Allows to establish for a certain period from where the resources are obtained and in which they are applied.
• It is not a cash flow, but a different presentation of cash flow, it does not work with cash inflows and outflows, it works with sources and uses of resources.
FINANCIAL PROJECTIONS
• Evaluate the possibility of programs.
• Controls and corrects the deviations of the programs.
• Anticipate the need for funds.
• Facilitates credits and their negotiation.
• Fund profitability project.
• Anticipates refinancing or capitalization alternatives.
Preparation of Projections
• Historical information (3 years).
• Bases for the projection with economic situation (inflation, devaluation, interest rates), market study, competition, sector prospects, historical trend of income and expenses.
• Budget balance, GyP and cash flow.
Stages of projections
• 1 STAGE - Reclassify the financial statements of going concern and in new revise balance sheet figures.
• 2 STAGE- Estimate economic indicators; project income with market research, credit sales terms, product sales units, unit price and price variations over time.
Stages of the projections
• Cost of sales: In commercials this is equal to the purchase of merchandise; You must know the units, the unit cost and days of stock. In manufacturing, it involves preparing the financial statement, production cost and must know costs, days of the necessary raw materials, supplier deadlines, indirect costs, days in production.
• Administration and sales expenses: Salaries in these areas and expenses such as stationery, leases, commissions, advertising, depreciation, freight, etc.
• Financial Expenses: Predict the sources of financing and their costs.
• Other income and expenses: Determined by their importance.
• Income provision: According to the type of company and current regulations.
• Distribution of profits: It is defined as the policy of the partners or shareholders.
• Minimum cash balance: Establish the balance required to cover its operations and the policy on surplus and lack of cash.
• Fixed assets: Evaluate investments, their method of payment and sources of financing.
• Bad debt provision: Portfolio policies.
• Capital: Clarify if it increases.
• Reserves: Determine policies.
• Sales budget: Products, prices, units, etc.
• 3 STAGE- Production Budget: Based on sales.
• MP consumption and purchase: Related to sales and production.
• Labor: Define positions, wages, benefits, layoffs, etc.
• Indirect costs: A special table must be prepared determining costs.
• Administration and sales expenses, investment and financing plans must be projected and evaluated.
• Debt amortization plan: A table must be prepared.
• 4 STAGE- Presentation of the financial statements (G&P, cash flow and balance sheet)
Analysis of cash flow
• The value of a company is equal to the present value of its cash flows in perpetuity.
• Cash flow and profitability are the two indicators that allow monitoring the basic financial objective scope of a company consisting of maximizing its value.
Cash Flow Analysis
• A company's cash flow has three destinations:
• Replacement of working capital (KT) and fixed assets.
• Debt service attention.
• Profit sharing, if there are remnants for this.
Free cash flow (FCL)
• It is available to serve creditors and partners: Gross cash flow, working capital replacement - replacement of fixed assets = FCL.
