-> Once we gathered all the data, we can analyze the company from different perspectives.
-> Whenever we have the consolidated financial statements, we have the “aggregated information”, so we need to be able to take decisions.
=> DEF: Segmental analysis provide further information that will allow us to take informed decisions.
Ex. Segmental analysis of the revenues from a geographical perspective: where should LVMH develop? Asia, because now it is the biggest portion of their market share (29% of total revenue). Also United States is quite a big market. We should also have information about the saturation of these markets.
Ex. Segmental analysis of the revenues from a sector perspective: which sector should we invest in? We should have more information to answer this question as it depends also on how we imagine the future to be, and not only on the growth of the specific sector. This table is useful to understand how the company is constructed and how each sector is doing (for example here we don’t have problematic divisions). They actually decided to invest in selective retailing because they believed this would become a very important channel.
Ex. Segmental analysis of the revenues from a sector perspective: Volkswagen group. We can see that some divisions are negative (so they are not doing good, like SEAT) but the group will not close them because they are used for their brand positioning, for the brand picture, not to gain profit.
-> Segmental analysis is crucial whenever we are doing the benchmarking of a company. The more similar the companies, the better the competitor analysis we can make. It is difficult to compare the segment of the companies because companies provide “aggregated” data, not data about each sector (as they are not obliged to publish them).
Common Size Analysis:
-> DEF: displays each line item of your financial statement as a percentage of a base figure to help you determine how your company is performing year over year, and compared to competitors.
- First analysis that we see;
- Is the basis for identification of real things we have investigate on.
-> Common-Size analysis is the restatement of financial statement information in a standardized form.
- VERTICAL COMMON-SIZE : lets you see how certain figures change in your business compare with a selected figure in one given time period.
- For example, you might use it to see what percentage of your income is used to support each business expense.
- Each account’s amount is restated as a percentage of the aggregate.
- Balance Sheet: aggregate amount is total assets;
- Income Statement: aggregate amount is revenues or sales.
- HORIZONTAL COMMON-SIZE: Common size horizontal analysis lets you see how certain figures in your business change from one year to the next to help you spot trend.
- You can easily see if your expenses increased as a percentage of revenue, stayed the same or decreased among different time periods.
-> Useful when comparing growth of different accounts over time.
| VERTICAL | HORIZONTAL | |
| APPLIED TO | BS, IS (even CF statement) | Any document. |
| TIME FRAME | 1 yeas analyzed, we compare it with what was happened previusly. | At least 3 years, we need to look for trends; |
| HOW | In the IS, we take the net sales/revenues as 100%. We transform € in % by dividing each element by the revenues for the IS and the total assets in the BS. | We take a certain year as the baseline, so every value of this year is 100%. |
| OBJECTIVE | In the IS, we can see which % of the revenues is the net income (usually around 10%). In the BS, we can see the distribution of the assets (which % of the total assets are current, non-current, etc.). We can compute EBITDA margin and EBIT margin (found in IS by nature). | We want to see how each voice changes over the years. |
Vertical Analysis:
-> OBJ: Is providing which is the weight of the single voices
-> Important in order to understand:
- Which are the % of the post (how company is changing throughout years).
- The EBIT and Profit margin.
- Compare difference company;
- Compare the develop of each voice year by year.
-> We use to compare company, we can’t compare the natural number. We have to compare the percentage. For more years (not for only one)
Development of each voice: we can see it by comparing the percentage of a voice in one year with the same of another yeas.
-> Allow to see if a company has reconfigured its business.
📌 By Nature would be “Nature of the Cost” (Raw manterials, ammortizations, …)
-> Vertical Common-Size Analysis on BS
Intangibles are mostly the same, they diminuish a bit, as well as cash => they did not do anithing of extraordinary.
Horizontal Analysis:
-> We see the dimension of the change;
Example:
-> Analysis:
- ENI: 70% are non-current assets because the company is a production company (they mostly have PPE). More RIGID company.
- Facebook: 50%-50% because the goodwill is very high (they have acquired many companies).
- IMA: 62% are current assets because their business is much faster –> for them is more important to be ELASTIC.
-> If we look at the incidence of the operating costs: for Facebook, the major cost is R&D; for IMA is raw materials; for ENI is purchases, services and other so they are quite dependent on their supplier.
EXAMPLE:
-> The company with the highest income is B (893$). The company in which the net income is a higher % of the net sales is A (A 5,7% – B 4,8%), so A is managing better their costs (it’s more efficient).
-> ⚠Attention⚠: the absolute numbers give us the idea of the dimension so when comparing different companies, we should consider that. In fact, bigger companies have to manage more complexity, so they will probably be less efficient. Percentages (margin ratio indicators) help us compare different companies, but we should not forget the fact that they could have a different dimension.
Reclassification and Adjustments:
-> OBJ: provide more readable and more comprehensive information about the company for the final users, so the stakehoder and shareholders.
-> AIM: reorganize financial statement in order to:
- Incrase their readability;
- Underline key financial results;
- Improve the comparability between different enterprises.
Basic EPS > Diluted EPS (the denominator is greater in the case of diluted EPS). The n° of shares will be present in the Changes of Equity Statement.
-> Accounting principles might be differ between organizations.
-> Object of E&A are BS and IS.
Balance Sheet Reclassification:
-> The purpose of BS reclassification is to highlight
- FC: Fixed Capital;
- NWC: Net Work Capital;
- NFD: Net Financial Debt.
Fixed Capital:
Net Work Capital
-> DEF: represent the amount of the liquidity necessary to run the business during the working capital cycle.
-> It takes account in:
- Receivable;
- Payables;
- Inventories;
❓Is it better to have a high or low NWC? There is not a universal answer. It depends on the company dimension and on the product. If 2 companies produce the same product, it is interesting the compare the amount of money they need to complete the production cycle.
WORKING CAPITAL CYCLE: average time it takes to acquire materials, services and labour, manufacture the product, sell the product and collect the proceeds form customers.
📌The working capital cycle can be 1 day or even a couple of years, it depends on the company. For pharma companies, patents have to be disclosed within 5 years (by law).
-> NWC is a measure of the operating liquidity of a company.
- Underlines the ability of an organization in managing the operational cycle (receivable, payables, inventories).
-> In practice there are different labels and formulas that are used with reference to: NWC =Current Assets – Currnet Liabilities.
=> WC is all the money needed for production (all cash out flows in the operating part of the cash flow statement).
=> Net working capital = working capital (receivables, inventories) – liabilities (tax, payables) = = current assets (minus cash) – current liabilities (minus debt)
*Liabilities within 12 months period
Ordered work in progress: it is an operational cost.
Ex. Fincantieri: due to an increase in Trade Payables, we have a change in the NWC of the company. If a company has a negative NWC, it’s not good, because it is good when the current assets are higher than the current liabilities (because it means that we would be able to repay our debts). The problem is that that the trade receivables have diminished. Having a negative NWC DOESN’T MEAN that the company is failing, it could be for example that the company made a big investment, therefore they had less cash. The important thing is that overall, there is a positive trend. If the NWC is negative, we should investigate and understand the reason behind it.
-> Let’s take out due to investment (are not normal operations);
-> We have two type of analysis.
- Border one;
- More specific.
Net Financial Debts (or Net Financial Position):
-> DEF: total debts of the company less available cash
- A driver about the ability of the enterprise to reimburse its debts if they were all due today
- Debts = (Bonds are securities issued by the company, bank debts and other financial liabilities; both current and noncurrent
- ⚠The debts are NOT account taxes, employees, etc.
-> We are able to understand our financial position.
-> Cash final sheet is in current assets.
- Cash is something that we can’t take immidiately to cover our debts.
❓Is better to have a high or low NFD? Having a debt is a strategic decision (short or long term, to cover what) so when comparing the NFD of different companies we need to take into account their strategy and their structure:
Financial leverage = total debt/equity (<= 3, but it depends on the industry)
So, the NFD depends on the industry and on how the company is operating: the company could be mostly financed by the debt or by the equity –> the NFD could be negative if the cash is much bigger than the debt. If NFD is negative, it means that the management of operations is quite good.
Example:
Henkel. 2014: negative amount. The financial debt increased (because they acquired other companies) but the cash remained similar.
Was it a good or bad decision? We need to know more information, like the income, to say if it was an improvement or not.
NET DEBT = NET FINANCIAL POSITION
-> Example of a RECLASSIFIED CONSOLIDATED STATEMENT OF FINANCIAL POSITION: For example, this company is majorly financed by the equity (83,8%)
Income Statement Reclassification:
-> The objective of the reclassification of the IS is to highlight:
- Value added = revenues – raw materials – G&A expenses = which type of actions the company performs to add value to the final product;
- EBITDA = value added – personnel costs (HR costs);
- EBIT = EBITDA – depreciation & amortization;
- EBT (earnings before tax and extraordinary items) = EBIT – net financial expenses.
-> EBIT and EBITDA give more information about how the company is doing (more than the net income), because they show the real results of the company due to the operations.
-> EXAMPLE: Fincantieri we can see the EBITDA and the EBIT margin:
Adjustment:
-> DEF: a change in the FS aiming to adhìjust them if something extraordinary happen (ex. Scandal or Plague).
RECLASSIFYING: means changing the structure of financial documents to highlight some elements (the “building blocks” are the same).
ADJUSTMENT: the structure is the same, but we decide if we want to ADD/REMOVE some of the building blocks. So, adjustments refer to the amendment of an item (number) disclosed in annual reports.
❓Why adjustment?
-> When unexpected events occurred or when accounting principles have changed over the years, the disclosed numbers in annual reports can be revised to provide a fair representation of the current situation;
❓What is adjusted?
-> EBIT, EBITDA, Operating profit, net profit, (more rarely current assets) … are typical items that can be adjusted.
Adjusted EBIT = excludes certain adjustements from net profit from continuing operations including gain/losses on: disposal of investments, restructuring, impairments, asset write-offs and unusual.
-> Adjusted EBIT is used for:
- Internal reporting to assess performance;
- As part of the budgeting and decision making processes;
- To provide additional transparency to the Group’s core operations.
Other sources:
