COMPREHENSIVE FINANCIAL ANALYSIS: Measurement of financial performance, financial ratios and indices
The ratios "are relevant relationships between two magnitudes, simple or aggregated, whose quotient is more significant than any of them separately".
how-to-do-a-financial-analysis-using-ratios-and-dupont-systemFor example, knowing that a company has a Current Assets of 200 and a Current Liability of 100, does not provide us with much information, on the other hand, if we calculate the Current Assets / Current Liabilities ratio, we verify that said company has a positive liquidity ratio. Thus, they are a useful way to collect large amounts of financial data and compare the evolution of companies.
Proportions quantify many aspects of the business, but are not generally used in the isolation of financial statements, but are considered an integral part of financial analysis. The results of a proportion give rise to the question "why?"; additional analysis is necessary to answer. The ratios take into account comparisons:
- between companies,
- between industries,
- between different time periods of a company and
- between a company and the industry average.
1.2 Analysis of financial ratios
Main ratios used
The main ratios to be analyzed depend on four variables: Active, Own Resources (Capital), Sales and Profit.
Through these four variables, you can obtain the performance, profitability, margin, leverage and turnover ratios.
Chart 1.1
1.2.1. Financial Ratios
The ratios analysis starts with the financial statements. Said documentation must be suitably refined to reflect the authentic real state of the company. For example, those results should not be considered as a consequence of extraordinary company activities, because in order to make decisions we cannot rely on results that are not habitual. In the same way, it is necessary to eliminate certain items from the balance sheet that reflect situations that are no longer relevant for management.
1.2.1.1.- Balance Sheet Ratios
The ratios that include Balance sheet figures are usually calculated with average data, that is, with the average between the closing of the previous year and that of the current one, so that the volatility of the closing of a year is partially eliminated.
There are many referred to the short-term situation of the company, since it is there where there may be a greater conjunctural risk not controlled by long-term estimates. The most important could be:
• Working Capital on Sales: The working capital is the difference between Current Assets and Current Liabilities, that is, the short-term position of the company. Measuring it on sales gives an idea of the efficiency with which the assets are used, and their importance in generating the sales figure. A level in the 15 percent environment is reasonable.
• Working Capital on Current Assets Fund: It seems that in a way it is turning the same concept, but what this ratio is trying to do is interpret the degree of coverage of the working capital itself. A positive working capital of 100 million seems quite high, but if it comes from a Current Assets of 1.2 trillion and a Current Liability of 1.1 trillion, it loses relevance.
• Leverage: It measures the debt situation of a company. Only debt with cost is considered and can be measured on total assets or on equity. In both cases, it is a matter of giving a relative measure of said indebtedness, avoiding absolute figures. Thus, a debt of 70 percent of total assets reflects a company with a high debt situation that, in the income statement, has a high financial expense figure.
• Debt with cost over Liability: This ratio tries to disclose the percentage of Liability that has cost. There may be companies with very high callable Liability figures that are due only to a very strong position with suppliers, but
without incurring any cost in the income statement (in construction companies, the late payment by the Administration causes the Liability to increase without cost to finance itself).
• Rotations: It is a way of analyzing the speed or slowness of a company in collecting, paying or settling inventories; This capacity will be reflected in the position of working capital or operating fund needs (NOF).
• Accounts Receivable Rotation: It is calculated as sales on the average balance of customers at the beginning and end of the year. It reflects the speed with which customer accounts are charged (rotated).
• Accounts Payable Rotation: It is calculated as the cost of the products sold (what is subtracted from sales to obtain the gross margin, which contains the cost of raw materials) over the average level of suppliers in the year, and also reflects prompt payment of suppliers.
• Rotación de inventarios: Se calcula como coste de los productos vendidos sobre el nivel medio de existencias en el ejercicio. Este ratio refleja la cantidad de veces que rotamos las existencias. Niveles elevados de rotación deberían ser positivos, aunque suponen un mayor coste de producción en un entorno inflacionista, eliminan riesgos de obsolescencia, al tiempo que impiden la paralización de un nivel elevado de fondos en este tipo de Activo Circulante. A partir de este ratio se pueden obtener otros muchos como tiempo necesario de producción, días de inventarios, etc.
The comparison between accounts receivable and payable gives us an idea of the company's strategy in treasury / Circulator management. If a company rotates its accounts receivable 4.5 times a year and its accounts payable 3 times, it will obtain financial income from this management; the opposite situation generates financial expenses.
• Current ratio: The current ratio is also used to analyze the short-term situation of the company in terms of liquidity. It allows us to value the degree of financial solidity that a company has, comparing its resources with its commitments or obligations. The greater the current assets than the current liabilities, the company will have more slack for the payment of debts, although too high ratios can be detrimental because they denote the existence of large assets in relation to small business volumes. This quotient provides the quantity of the asset and not its quality, enclosing risks of the type: damaged or second-hand merchandise, old-fashioned, etc. and uncollectible accounts receivable. The 2 x 1 ratio, that is, there are two liquidable resources for each debt,It is an index of calm financial situation, for most businesses, under normal conditions.
It is defined as Current Assets over Current Liabilities.
Current ratio = Current Assets Current
Liabilities
• Acid Test Ratio: It is an even more short-term ratio, since it tries to include only what is very liquid in the company. It is defined as treasury and temporary financial investments on current liabilities. In this way, the company's cash position is analyzed. The values are usually very low (0.1-0.05), as the company tries to maximize its funds in the short term.
Acid Test Ratio = Cash + Financial Investments + Accounts Receivable
Current Liabilities
• Accumulated Amortization Rate: Percentage of gross fixed assets already amortized. It is important to study the policy of a company when it comes to giving more benefits through a lower endowment; In this case, it can be seen that the accumulated amortization is low and that, therefore, an effort will have to be made in the future, which may lead to negative extraordinary items appearing in results due to obsolescence. Being able to know future investment plans is also another purpose of this ratio.
1.2.1.2.- Ratios of the Income Statement.
In some cases, they relate income statement data to balance. The main ones would be the following:
• Cash-Flow on Debt: gives an idea of the funds generated on the level of debt that the company has. As we bring this cash flow closer to free cash flow, it may assume the company's annual capacity to repay part of the debt at cost.
• Financial Expenses on UAII (Earnings before interest and taxes): Also called coverage of financial expenses. The idea is to study the extent to which the income statement "lives" to pay society's debt. Ratios greater than unity assume that more than what is obtained by the typical activity of the company is destined to remunerate its debt.
• Amortization Rate: It is calculated as the weight of the amortization allowance on the average gross fixed assets. It comes to represent the part that is amortized annually and is closely related to what is mentioned in the accumulated amortization ratio.
• ROE (Return on Equity): Profitability. One of the most used and most significant ratios for the analysis. It is measured as the distributable Net Income over the average figure of Own Resources. In short, it is the profitability that shareholders obtain (Net Income) from the funds invested in the company (own resources). Profitability is for profitable companies, the most important ratio since it measures the Net Income generated in relation to the investment of the owners of the company.
As the value of the profitability ratio is higher, the better this will be. In any case, at least it must be positive, although by convention it is usually pointed out that an ROE below 4 percent continuously eliminating cyclical effects means that the shareholder is losing money, since investing in Letras would not have any type of risk and also get roughly the same.
Major decompositions of Profitability can still be made.
In the following decomposition, profitability is divided into five ratios when multiplied by Sales / Sales, Assets / Assets, UAII / UAII and UAI / UAI.
With this decomposition, profitability can be explained from turnover, margin, financial leverage and the fiscal effect.
• ROI (Return on Investment): Yield. It is the same concept but measured on Average Total Assets. The idea is to analyze the profitability of those Assets and the level of infrastructure of the company; on many occasions, a poor asset endowment reduces the ability to generate benefits. The study of the performance allows to know the evolution and the causes of the productivity of assets of the company.
The higher the yield, the better because it will indicate that more productivity is obtained from the Asset. The drop in the performance ratio means that this company loses productivity of its Assets.
ROI = Earnings before Taxes and Interest
Total Assets
In order to increase the yield, the sale price of the products will have to be increased and / or the costs will be reduced and thus the margin ratio will rise. Multiplying by Sales / Sales and ordering terms, we have:
From this point of view there are two very different ways to increase performance:
- Improve performance through high quality products that could be sold at high prices and even if they had a low turnover would generate a good margin.
- The opposite alternative would be to adjust the sale prices to sell the maximum number of units that would allow a high turnover that would compensate for the low margin.
• Operating Margin (%): It is the operating margin measured over the level of sales. It is about calculating the profitability, in percentage, of the operating activity of the company, without considering financial aspects.
• Extraordinary on UAII: The weight of extraordinary should never be greater than unity except in exceptional and punctual exercises. This type of ratios is specifically useful in sectors such as banking, where its generation can be high.
• Market Capitalization on Sales: It is a way of relating the price to the activity of the company. Extreme levels should light an alarm light, either because the company is endowed with a structure that is too large for its level of sales, so that the profitability of the Assets will be low, or because the company is trading cheaply, which will be a good opportunity to buy.
• Net Profit on Sales: The profitability of the income after all the loads of the account of results. The average levels fluctuate depending on the sectors to which we refer. It is not one of the most used ratios, although it gives a general idea about the total return.
• Pay-out: Percentage of Net Income dedicated to Dividends. High payout levels are dangerous, unless they correspond to companies with low profitability, in which case it is advisable. If the company obtains an average return lower than the cost of capital, it is recommended that the payout be increased and thus transfer the investment decision to the shareholders. There are sectors with high payouts motivated by historical reasons. However, they are now beginning to shrink as annual fundraising is too compromised. Payouts above 70 percent should be a reason for further analysis.
• Dividend on Cash-Flow: Knowing the percentage of the funds generated that is destined annually to dividends and their relationship with the investment plan is important, since it gives an idea of the strength of the financial situation of a company and its commitment found in the remuneration of its shareholders. Cuts in the investment plan to maintain the dividend should be viewed negatively by the investor, unless we again find companies with low returns.
1.2.1.3.-Ratios per Action.
The ratios per share are basically four, although some additional ones can be calculated as working capital per share, treasury per share (subtracted from the listing price and looking for companies that the rest is too low for the activity they carry out).
• Earnings per share (UPA): Earnings per Share (EPS). Consolidated net income, divided by the number of adjusted shares for each year. It is important to note that average benefits are not calculated, but those obtained during the exercise. It is better to work on a consolidated basis, that is, with the entire group, since the shareholder is the parent and this in turn of all the investments it has made.
The added value of this ratio is found in the estimates of UPA futures and in their average growths, which should be reflected in the price.
• Dividend per share (DPA): Dividend per Share (DPS). Gross dividend paid by the company for each share. There is no room for adjusted shares here: what matters is the Nuevos Soles paid per share.
There are times when different shares are listed based on different profit shares (old, new, newest…). The analyst must consider the dividend of the old ones, because they are normally the most numerous and most representative. This does not mean that to calculate the total payment of the dividend company (and to calculate the payout) the payment for each type of action should not be adjusted. But when the dividend payment per share is mentioned in a report, it usually always refers to the payment of the old ones.
• Cash flow per share (CFA): adjusted shares are used again. Cash flow is usually understood as Consolidated Net Income after minority interests plus amortizations. This conception of cash-flow or generated funds is based on the theoretical idea that the income statement corresponds to cash movements. Thus, it is considered that the income figure enters the treasury in the year, like the rest of expenses and income leaves / enters the same period, which does not have to be true, since there are expenses that are not paid in exercise. However, and in general terms, the errors by this conception are not significant with respect to reality. If we accept these statements as good,the funds generated by a company will be Net Income plus the amortization allowances made in the income statement, since it is an accounting entry that does not require a cash outflow. Provisions should also be considered whenever their importance is high.
• Book value per share (VCA): Book Value per share (BVPS). The previously mentioned net worth is divided by the number of adjusted shares.
In all cases of data calculation per share, the objective is twofold: average future growth and the comparison of the ratio with the price, for which we use the stock market ratios.
1.2.1.4.-Stock Market Ratios.
The price-share ratio only seeks to have a relative idea of the times that any financial aspect is contained in the price:
• PER (Price Earnings Ratio): It is the division of the price of a share between Earnings per Share, so that the number of times it is contained in it is obtained. Thus, a PER of 20.5 times will assume that the price the investor pays when purchasing is equivalent to 20.5 times Earnings per share.
The PER always refers to an exercise or period (usually estimated). PER of sectors and the stock market are also calculated, so that they can be compared with each other and with other countries. The way to calculate a PER of a sector or a stock exchange is to weight each individual PER of each company by its market capitalization, obtaining a weighted average.
Lower PERs mean cheaper stocks, provided the estimates are well made.
The ratio of the company's value to operating margin before amortizations is a synonym of PER but including all the company's Assets at market prices (instead of capitalization or own resources at market price) over the margin applicable to this magnitude. (Operating margin). It is a ratio that in recent years has increased its use among analysts and that allows a more accurate assessment of the relationship between the market and the income statement, including the degree of leverage of the company.
PER = Mcdo Value per Share
Earnings per Share
Factors influencing PER
• PCF: Cash-flow price. It is the same concept but applied to cash flow instead of Earnings per share. The PCF are usually lower, since the cash flows generated by the companies exceed the benefits (net profit plus amortizations).
In general, the PER is more important for the purposes of quick comparison, but the PCF should be used much more than it is. The important thing about a company is the funds generated and not how it counts to obtain attractive benefits.
The PCF is especially important in sectors such as banking, where provisions (also not cash out) play a very important role. The banking sector should be compared exclusively by PCF.
It is also used for normally estimated exercises.
• PVC: Book value price. This is the number of times net equity per share is contained in the price. It is especially significant in shares that are trading below unity, which means that shares are being exchanged in the market at prices below what the accounting says, which in turn usually responds to very low valuations. Unless the company presents a very negative outlook, it should not be normal to find PVC less than one: values with PVC less than unity and with good prospects are usually a clear purchase.
It is calculated by exercises and normally the last closed and audited is used, so that the book value of the items is known exactly.
• Dividend yield: percentage of the price that represents the total gross dividend paid by a company in a fiscal year. It is a widely used measure, since it is a guaranteed annual liquid return at the time of purchase (as long as the company does not opt for a dividend cut). In this way, if an investor buys VolcanC1 with a dividend yield of 3.3 percent, regardless of what the listing will do next year, they will obtain a gross dividend yield of 3.3 percent.
• Adjusted ROE: more than a ratio, it is a way of valuing companies that uses several of the concepts mentioned here. The generic form is an equivalence between two ratios: quotation on net value per share and ROE on cost of capital. The net value per share is understood as the book value adjusted for capital gains, excess / defect of provisions, that is, the book value adjusted, in the opinion of the analyst, at market prices. The equivalence between ratios indicates that the relationship between what the company obtains from profitability of its own resources and its cost of capital or opportunity (ROE / cost of capital) must be equivalent to the relationship between the market price and the book value. tight. It is usually used as a means of valuation, since obtaining ROE,cost of capital and adjusted book value per share can calculate the price or theoretical value.
In summary, the ratios can be grouped as follows, for better compression.
Efficient translation of sales into profits
- Gross margin
- Operating Margin, Profit Margin, Profitability of sales (Operating margin, Profit margin, Return on sales)
- Net Margin (Net margin)
- Efficiency Ratio, Operating Leverage
Efficient use of assets to generate profits
- Return on Assets, Return on Net Assets (ROA), Return on net assets (RONA)
- Return on Equity (Return on equity (ROE))
- Return on Capital, Adjusted Risk of Return on Capital (Return on capital (ROC), Risk adjusted return on capital (RAROC)
- Return on capital employed (ROCE)
- Inventory turnover (Inventory Turnover)
- Cash flow return on investment (Cash flow return on investment (CFROI))
- Collection period (average period) Collection period (end of period) Collection inventory (period average) Collection period (period end) days Inventory)
Leverage
- Debt to assets ratio
- Debt to equity ratio
- Interest coverage ratio
- Return period: How many years of operating profit are necessary for profitability debt: Debt / EBITDA (Payback period: How many years of operating earnings are needed to payoff the debt: Debt / EBITDA)
Liquidity
- Current liquidity (Current ratio)
- Acid Test (Quick ratio)
Stock valuation
- PER (price / earnings) (PE ratio (price / earnings))
- PER of growth (PEG ratio (PE / growth))
- Share price / sales (Price / sales ratio)
- P / B (price of the share / book value) (P / B ratio (price / book ratio))
- Share price / Cash Flow (Price / cash flow ratio)
- Dividend distribution rate (dividend / price - but not really 'a '(Dividend yield (dividend / price - but not really a' valuation '))
- Earnings yield (earnings / price or the flip of P / E)
- Beta coefficient (Beta coefficient)
Summary table of the main ratios.
1.3 Inflation, Devaluation and the Financial Statements
The financial statements are limited to providing information obtained from the record of the operations of the company under personal judgments and accounting principles, even when it is generally a situation different from the real situation of the value of the business.
The currency, which is an instrument of accounting measurement, lacks stability, since its purchasing power changes constantly; therefore, the figures contained in the financial statements do not represent absolute values and the information they present is not the exact one of their situation or their productivity.
The differences that exist between the figures presented in the financial statements based on historical costs and the real value are caused by at least the following factors:
a).- Loss of the purchasing power of the currency.
b).- Supply and demand.
c).- capital gain
d).- Defective estimate of the probable life of the assets (Fixed assets).
The loss of the purchasing power of the currency is caused by inflation, which is the sustained and general increase in the price level. The recording of the operations is done in monetary units with the purchasing power that it has at the moment the goods and services are acquired; that is, transactions are recorded at cost in accordance with accounting principles.
This has the consequence, in an inflationary economy, that said operations over time are expressed at costs of previous years, even when their equivalent value in current monetary units is higher, in such a way that the financial statements prepared based on the cost do not represent their current value.
The information presented in the statement of financial position is fundamentally distorted in the investments presented by goods, which were recorded at their acquisition cost and whose price has varied over time.
Generally, inventories show differences of relative importance due to the rotation they have and their valuation is more or less up-to-date. Investments of a permanent nature, such as land, buildings, machinery and equipment in general, whose acquisition price has remained static over time, generally show significant differences in relation to their current value.
On the other hand, the capital of the companies loses its purchasing power over time due to the gradual loss of the purchasing power of the currency. From the point of view of information on the results of operations of the company, we have deficiencies caused mainly by the lack of updating the value of inventories and the intervention of a real depreciation.
Hence the importance of restatement of the financial statements, the restatement of financial information is to present the financial statements of a company in figures or weighted weights of purchasing power as of the closing date of the last fiscal year.
As for the differences between the financial and the economic, the financial refers to the values expressed in monetary units, strictly referring to costs and prices on the dates on which the operations were carried out. The economic refers to current values related to the purchasing power of the currency at a certain time.
Because the financial statements are formulated in accordance with the principle of base or historical value, in which it is established that the value is equal to cost, operations are recorded in monetary units on the dates they are carried out and, therefore,, we are adding currencies with different purchasing power. Thus, the financial statements show a financial but not an economic situation. In addition to the above, the financial statements do not normally consider certain factors that influence the economy of the company and that add real value to the strictly financial one, such as customer portfolio, image, experience, concessions, efficient organization, accredited products, good location for the supply of raw materials, etc.
From the above it follows that the main phenomena caused by inflation, which directly affect the company are: scarcity, labor shortage, high production costs and financing.
With regard to our country, in 1990, a methodology for adjusting financial statements for inflation was proposed, beginning a new accounting era in Peru. This change was recorded in Resolution No. 1 of the Accounting Standards Board, as a response to the distortion generated by the recording of transactions with different monetary values. These values caused that the accounting situation of the companies' financial statements was distorted by the loss of the monetary value of the Peruvian currency (Nuevo Sol), implicitly recognizing that the revaluation of the Fixed Assets would not satisfy the demands for reliable information.
This resolution orders "to adopt the principle of Adjustment to Constant Currency in the economic information of the country's economic agents." The objective is to have a better source of information on the economic and financial situation of companies that can be used by shareholders, management, creditors, banks and other entities that require it.
It is important to mention that in the international context and in accordance with IAS 29, the monetary adjustment or correction of the financial statements should be carried out when the economy is going through a hyperinflation process. If we analyze the evolution of the price level in our country, we will notice that this hyperinflationary process stopped in 1992, just when it becomes mandatory to adjust financial statements for inflation and incorporate these figures as historical. Neighboring countries include inflation in historical financial statement figures since the 1970s, while companies in Peru only revalued Fixed Assets, in a partial attempt to correct numbers.
IAS 29, referring to financial information in hyperinflationary economies, says that during a time with a hyperinflationary economy, this standard should be applied both in the entity's financial statements and in the consolidated financial statements, since the local currency is not useful if it is not restated. Money loses its purchasing power, so that, when comparing the amounts of operations and other events that have occurred at different times (even in the same year), one can conclude misleading results.
It should be mentioned that this rule does not establish an absolute rate at which inflation is considered to originate. Establishing when it will be necessary to express the financial statements, in accordance with this standard, is a matter of judgment.
Thus, both DL No. 627 and Resolution No. 2 propose a comprehensive adjustment of the financial statements: the Balance Sheet, the Statement of Profit and Loss and the Statement of Changes in Equity. With this established standard, the companies had to prepare the financial statements at constant values and use the tax base adjusted for inflation to settle the income tax.
The comprehensive adjustment method proposes the restatement or update of the non-monetary items in the financial statements. These items are not affected in times of inflation; however, its historical book value is distorted precisely by the effect of this phenomenon. The increase generated by the updated value of the non-monetary items is accumulated in the account Result Exposed to Inflation (REI), which is part of the taxable base of the third category income tax.
For non-monetary items to reflect their real value, the historical value is multiplied by the update factor, a coefficient that results from dividing the closing correction index by the origin index. In this case, the correction index is the wholesale price index (WPI).
We would like to highlight some important aspects of the adjustment methodology. First, the REI account reflects the company's exposure to inflation for a given period. This result is generated by monetary items; however, this exposure is quantified in the REI account by correcting or adjusting the non-monetary items. Second, the REI account accumulates, in addition to the inflation effect, the profit or loss from the exchange difference generated by transactions in foreign currency.
It should be noted that although the accounting standard includes the adjustment of the statement of cash flows and complementary information, the tax regulations are not clear in this regard. Therefore, there is no agreed method to carry out its correction. The adjustment is used only for the purposes of comparative analysis without tax incidence.
After the companies applied the integral adjustment method of the financial statements for some years, the government promulgates Legislative Decree No. 797, dated December 31, 1995 and effective from the taxable year of 1996 onwards. The apparent reason for its promulgation was the overcoming of those hyperinflation levels registered in previous years.
All this gives rise to uncertainty for decision-making because there is a lack of updated information and, if there is no policy of separating from profits at least an amount that added to capital, results in at least purchasing power. As in the previous year, the consequence will be the decapitalization of the company and, over time, its disappearance.
1.4 Pyramid of ratios
The Pyramid of Ratios, also called Dupont Analysis, has the purpose of summarizing in Diagram form the triggering of most of the Indexes or Ratios until now analyzed. The culminating point of this Pyramid, that is to say, its peak is formed by the Financial Profitability Index and from this the different indices are degrading whose function is to explain the reason for each of the behaviors that originate.
The graphic expression of this Pyramid, as it could be seen in the decomposition of the ROE, is as follows:
Chart 1.2.
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, the Net Margin Index, is 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 objectives of the organization
Another essential aspect is Expenses, nothing is solved by increasing sales if there is no savings policy that results in high Profitability. Monitor the costs so that the final result allows reaching a level of profit that meets the objectives and interests of the company.
Interpreting the Du Pont graph, it shows the relationships between return on investment, asset turnover, net profit margin and leverage (level of indebtedness).
The left side of the graph develops the net profit margin on sales. The various expense items are presented as a list and are then added together to obtain total costs, which are subtracted from sales to obtain net income. If the profit margin is low or if it is trending downward, you can examine the expense line items to identify and correct the problems later.
The various categories of assets are listed below, their total is obtained, and then the sales are divided by the total Assets to find the number of times the Asset has rotated.
The ratio that multiplies the profit margin by the rotation of the total Assets provides the rate of return on the investment.
If the company were financed only with Capita Contable, the ROI rate and the ROE rate would be the same, because the total Assets would be equal to the amount of stockholders' equity. If not, the ROI rate must be multiplied by the equity multiplier, which is equal to the ratio of Total Assets to Equity. In this way, combining the two equations, the ROE rate is obtained.
The Du Pont equation shows how the profit margin, the turnover of assets and the use of debts, interact to determine the return on investment of the owners, as shown below:
1.5. Financial Analysis Dashboard
Having the right information at the right time is one of the distinguishing features of leading companies.
In all of the companies, there are critical areas that you must know how to manage and in which the availability of information is essential for decision-making. There are key aspects, which are basic to know the evolution of the business, and more when we try to assess which resources are the most profitable, the most appropriate investments or when the risk exceeds the expected profitability. An agile visualization of these indicators through a tool such as the scorecard is becoming a fundamental application for decision-making in all types of companies, where the first to benefit are the financial departments.
The financial analysis dashboard allows you to have synthesized information on the relevant data and globally appreciate the evolution of the key variables at each level, as well as their deviations. Thus, it becomes a measurement tool, a support for decision-making, a control tool and a means of communication, since it helps make this information, and the company's strategy, accessible to all. those responsible and at all levels of the organization.
The planning and forecasting of investments, the availability of updated information and the numerous economic / financial factors that must be analyzed daily are some of the ratios that lead companies to bet on the financial analysis scorecard. Likewise, to these aspects are added factors, such as globalization, the increasing presence in organizations of functional areas and the need for abstraction and knowledge to interpret the direction of the market and of the company itself.
The dashboard makes it easy to analyze, understand and visualize key elements. For this, indicators are used, also called KPls Key Performance Indicators-, which allow visualizing and interpreting the results of business management. This selection and the frequency of control must be adapted to each managerial level and to each individual control profile of those responsible.
It is therefore very important to set goals or values with which to measure the degree of fulfillment of the objectives, to compare it with the imposed forecast and as a control tool to carry out adequate follow-up.
The scorecard, as we mentioned before, allows us to leave absolute values behind and abstract those key indicators. For this, the use of ratios is important. In this way, we make our control independent of absolute values, which offers a vision with more quality and management balance.
We can have ratios that express percentages; number of times, rotations, periods of time and in some cases it may be convenient to maximize them, minimize them or simply keep at a satisfactory value. For this reason, visualization by speedometers and other indicator graphs as well as automation by alerts is of crucial importance.
The effectiveness of using ratios resides largely in the possibility of comparing them with others over time to see their historical evolution; with the data of the forecast and the budget (we would be before a comparison with the objectives); and also with similar companies in the sector and with the competition.
1.5.1. Keys to the financial area
The financial analysis dashboard integrates the economic and financial information available in organizations, based on the Balance Sheet and the Income Statement. The indicators measure profitability and provide information when managing the treasury. In addition, they provide analytical information - both vertically and horizontally - on the wealth masses and economic activity.
At a glance, the financial or accounting manager knows the margins, the evolutions and returns, can consult the indicators related to the structure of Assets and Liabilities, the short and long-term liquidity, the guarantees that the company can offer third parties, their solvency to meet payments, the average time it takes for the money invested in the company's activity to return to its treasury, and so on.
A financial analysis dashboard allows you to automate the information in this area and facilitate its interpretation. In addition to facilitating the work of the financial department, it greatly benefits the organization's business as a whole, avoiding idle financial resources, helping work with the circulating part, to dose resources and generate alerts to the person responsible for other areas about different indicators in the table that could affect them. Such information helps the organization to anticipate circumstances and improves its capacity to react.
1.5.2. Fast progress in the business field and continuous evolution.
The financial analysis scorecard is advancing rapidly and inexorably in the business field, especially in large organizations that, due to their specific characteristics, manage a significant number of sources of information and a wide range of tools that house strategic data. to analyze and interpret. These dashboards are a fundamental tool for advanced financial analysis of the multiple areas of control and lines of business and results in these organizations. This does not mean that the Financial Scorecard is an exclusive tool for large companies. It also provides multiple advantages in lower segments of the business pyramid and, due to this, an increasing number of medium-sized companies are betting on it.
An interesting aspect in the implementation of these tools is the low resistance to change of the financial departments, which on many other occasions have been reluctant to implement some Information Technologies (IT) due to the expected loss of exclusive control. The reason for this favorable acceptance is that it is an exclusive tool for the financial manager, with mostly confidential indicators that are sometimes shared with the general management and that have predictive value and planning support for quarterly reports. and annual.
The financial analysis scorecard has undergone an important evolution, with the detection of new needs and they are the incorporation of new generation technologies on a daily basis. Among its elements, the one that perhaps has changed the most in recent times, has been the user interface.
The reason has been to facilitate its visualization and improve its appearance, in order to interpret the indicators with a simple glance. But also the functional aspect is important, logically: more immediacy, automation, agility and usability are demanded. For example, in this sense, it is important that when the application is reloaded, the alarm is available at the moment and not the next day.
The evolution of Information Technologies is also allowing financial dashboards to continually incorporate new features and improvements to its platform, in order to eliminate existing limitations on the number of Indicators to display, expand the levels of navigation in the information up and down, boost the speed of installation and the fast and efficient display of data.
The financial scorecard has become a key and differentiating element for the economic and business area of many organizations. It makes it possible to have timely information at the right time, facilitating decision-making on aspects critical to profitability or investments, making it an effective tool for the competitiveness of companies in a constantly evolving market.
The Financial Analysis Dashboard, for example, allows to have statistics and economic and financial indicators for the information, control, analysis and decision making by the Management. These tools are linked to the information system of the company, and provide information in real time and in an agile and flexible way, which allows analyzing the deviations of the real data with the budget, extracting the data from the Balance Sheet, Income Statement, State of Origins and Application of Funds, Maneuvering Fund, Operational Needs of Funds, evolution of the Currency, evolution of the debts, Sensitivity analysis, Economic and Financial Profitability, etc., etc. of the chosen period and with comparison with previous periods
1.6. Application of Integral Financial Analysis to Peruvian Companies
Case: Pizzería Buona Note SA
Ratios Analysis of the Buona Note Financial Statements for the years 2,005 and 2,006.
Below are the Company's Balance Sheets and Results Accounts for the years 2005 and 2006, which will be analyzed to determine its performance, profitability and leverage levels and in light of these results to determine the financial health of the company. business.
Assumptions:
The ratios of the sector (of Italian food establishments) where Buona Note SA participates, determined by a highly credible consulting company for the years 2005 and 2006, which will serve as a benchmark, are as follows:
Chart 1.5.a
Graph 1.5.b
Financial, Operational and Total Leverage.
Chart 1.6. Earnings Before Interest and Taxes and Earnings Before Interest
Chart 1.7. Operating Leverage and Financial Leverage.
Qualitative Analysis of the “Pizzería Buona Note” Case
In view of the results obtained in the Ratios Analysis we can point out:
- Cost effectiveness. The potential of Performance (economic profitability) of the company is very high since it is operating with lower costs than the rest of the sector, however it would be necessary to improve the management of its Current Assets, in particular, of Stocks and Clients.
- Financial analysis. Thanks to the increase in economic profitability in the '05 exercise, the company achieves a positive leverage margin and is able to improve the profitability of its shareholders. However, the situation is still worrying, Buona Note has to positively expand its leverage margin, how?
• On the performance side (economic profitability), deepening in the lines already mentioned above.
• On the cost of External Resources, monitoring its evolution, since although it is only two points above the sector average, we can look for cheaper alternative sources of financing.
- Solvency. It should reduce both its collection period and its payment period to adapt to the operation of the sector, which would undoubtedly improve its profitability.
It seems advisable to review the financial structure that the company maintains not only of the proportion that external resources represent over its own, which could possibly be reduced by reducing investments in working capital, but also of the proportion of receivables in the short term over the long term..
The financial coverage ratios would have to be improved and in this way Buona Note would reduce the financial risk and the total risk of the company. To achieve these objectives, the company should take into account the recommendations made in relation to the liability structure.
Bibliography
ALEXANDER, SHARPE AND BAILEY: Fundamentals of Investments. Theory and practice. Third edition. Pearson Education, Mexico, 2003. (ISBN 970-26-0375-7)
ALTMAN, E. (1986). "Financial Ratios, Determinants Analysis and the Prediction of Corporate Bankruptcy", Journal of Finance.
APARICIO, A., GALLEGO, R. et al. (2002): Financial Calculus. Theory and Practice.
Thompson-Auditorium
ATHAYDE DE, GY FLORES R, 1998, “Introducing higher moments in the CAPM: some basic ideas”, Getulio Vargas Foundation, Rio de Janeiro.
AMAT, 0RIOL: “Financial Analysis”, Editorial Norma, Bogotá. Year 1995
AMAT, ORIOL: "EVA, Added Economic Value". Editorial Norma, Bogotá. Year 2002
BIRD, R., & A. McHUGH (1977). Financial Ratio: an Empirical Study.
BREALEY and MYERS: Principles of Corporate Finance. (5th Edition) Mc Graw Hill (1998). ISBN 0-07-007417-8 and 84-481-20023-X
BREALEY RA and SC MYERS. Fundamentals of Business Financing. Principle of corporate finance), 4th. Edition, McGraw Hill, 1993.
CFA Institute (2006): Ethics, Professional Standarts and Quantitative Methods
GITMAN L. Fundamentals of Financial Management. Volumes I and II.
ROSS, STEPHEN A., WESTERFIELD, RANDOLPH W., JAFFE JEFFREY F. Corporate Finance. Ed. Mc Graw Hill. 5th edition.
SIMON BENNINGA (2006): Principles of Finance with Excel. Oxford University
Press Inc.
SHARPE, WILLIAM, 1964, "Capital Asset Prices - A Theory of Market Equilibrium Under Conditions of Risk" in Journal of Finance, September 1964, pp. 425-442.
SHARPE, WILLIAM, 1994, "The Sharpe Ratio" in Journal of Portfolio Management, Autumn 1994, pp. 49-58.
STAMPFI and GOODMAN: Mathematics for Finance. Modeling and Coverage. International Thomson Editors (2003). Mexico. ISBN 0-534-37776-9
VAN HORNE JAMES C: Financial Administration. Tenth Edition (Prentice Hall Hispanoamericana SA) (1997). ISBN 0-13-300195-4 and 968-880-950-0
Web Pages:
www.investopedia.com/terms.asp
www.gestiondelconocimiento.com/conceptos_recursosycapalaciones.htm
www.gestiopolis.com/canales2/finanzas.htm
Historical Price of Shares and the Price and Quotation Index, consulted at:
Download the original file
