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Business management analysis using financial statements: Example

Business management analysis using financial statements: Example


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Management Analysis - Example of UD3 Fan Company

Before drafting the short report on the management trend of the Ventola company, Angelo feels the need to evaluate the finqui information analyzed by making temporal and spatial comparisons.
For the first type of analysis, he manages to reconstruct a series of information relating to the previous three years: the tax in a spreadsheet table similar to that shown in Table 21. The table contains what Angelo believes to be the most significant indices capable of summarizing the company's management performance, both from an economic and financial point of view. These are 12 indices which will subsequently be examined one by one, in order to identify the economic and financial trends of the company in the last three years of activity. In the last column on the right Angelo calculated the average annual rate of change in such a way as to put it immediately the main trends in evidence are highlighted.
Examination of the first two reports shows that with regard to productivity, both per employee and per hectare of UAA, the best year is 1992; the productivity of 1993 is substantially unchanged compared to 1991. The situation changes due to the analysis of profitability, both per employee and per UAA: 1992 is still the best year, but on average over the three years the trend is positive with approximately 5% annual increase. This different trend in profitability and productivity can find an explanation in a lower incidence of costs, noticeable especially in the last year. Overall, therefore, despite the substantial constancy of productivity, it is possible to obtain a good level of income since the Ventola company has paid particular attention to the amount of costs.
The analysis of the other two important profitability indices (ROE and ROI) confirms the considerations made above; cheriguardo even comes to operating profitability in 1993 is the year that shows the migliorrisultato. This phenomenon is the result of the combined action of both the RO / PLV and PLV / CI indices: 1993 is in fact the year in which the incidence of digestion costs is lower (about 62% of the PLV is transformed into RO, against lower percentages in previous years), and it is also the year in which the rotation of the capital invested is greater, that is, a higher PLV can be achieved by the CI itself.
A positive trend is also recorded in the index which highlights the incidence of extracharacteristic management; the higher ratio in the RN / RO index indicates that in 1993 there was a lower negative influence of the extracharacteristic components.
Over the three years, the debt ratio underwent a very substantial reduction in the transition from 1992 to 1993; this indicates a progressive extinction of mortgages, although, as noted in the 1993 analysis, a non-trivial trend can be judged positively. Other considerations regarding the financial aspect concern the liquidity index and the financial coverage index, from which it appears that the trend observed in the Ventolamostra company in the short term shows a progressive increase in available liquid resources compared to short-term debts, and in the long term a greater corporate strength, understood as the ability to cover all fixed assets with medium / long-term debt, especially with the entrepreneur's equity.
In summary, from an economic point of view, the temporal analysis conducted on the Ventola company highlighted 1992 as the best year for the company's results, since better productivity was associated with greater attention to the level of production costs on average, however, there is a positive trend over the three years, an element which suggests the possibility of obtaining good results also for the following years. In fact, since the slight decrease that occurred in some indicators in 1993 (compared to 1992) was caused in particular by the fall in productivity while the incidence of costs has even decreased, it can be assumed that, being able to adopt a greater production, the results will be even higher than those of the previous years. From a financial point of view, there is a gradual reduction in the use of external debt, thus favoring self-financing.The fact makes the company more stable and independent from the outside, at times it may be convenient to resort to external lenders in a more consistent way . In the same way, the increase in the liquidity index could suggest the entrepreneur Ventola to invest a part of the liquid resources in a more profitable form of the bank account.

Table 21 TEMPORAL COMPARISONS

Index

1991

1992

1993

Incr. annual

PLV / UL

32.870

34.620

33.100

0,5%

PLV / SAU

1.409

1.484

1.419

0,5%

RN / ULF

16.286

17.940

17.960

5,1%

RN / SAU

698

769

770

5,1%

ROE

14,3%

15,5%

15,6%

4,4%

ROI

11,6%

12,9%

15,0%

13,8%

RN / RO

84,6%

84,8%

86,8%

1,3%

CI / CN

1,46

1,42

1,19

-9,3%

RO / PLV

58,6%

61,1%

62,5%

3,3%

PLV / CI

19,7%

21,2%

24,0%

10,5%

Liquid assets

1,55

1,55

2,40

27,5%

Coperturafinanziaria

1,03

1,01

1,05

1,2%


Similarly to what has been done for temporal comparisons, the technician has prepared a table with the same indices as previously seen, but this time positioning in each column the data of different companies selected among those that he usually assists, based on their homogeneity with the company Fan. In particular, these are companies whose UAA ranges between 35 ha and 43 ha, in which the power of the machines ranges from 90 to 220 HP, in which the workers oscillate between 1.3 and 3UL, and in which almost all of the workforce is familiar. The four companies considered (Ventola, Batistuta, Del Piero, and Maldini) are all located in the middle hills and therefore do not have irrigated or irrigated UAA; Also in any of aziendeconsiderate exists husbandry. In reality four companies are not many to conduct a spatial analysis correctly, but, since these are only the data available to Angelo, the spatial analysis will be addressed with reference to the four companies identified, while the comparison with the average is already previously implemented in the analysis of each group of indices. Also in this case, comegià in the temporal analysis, in Tabella22 the most important economic and financial indices have been included.
Through their examination Angelo will try to verify how the Ventola company is placed compared to other companies that can be considered homogeneous, and in particular if it can be considered as a head, tail, or if it can be placed in the average. For the identification of the head and tail companies, the indicators that should be considered for the most part are RN / ULF (as these are companies that primarily use family labor), RN / SAU, ROE and ROI. An analysis of the first of these indicators shows that the best company is Del Piero, with more than 18 million net income per family work unit, followed closely by both the Ventola and Batistuta companies. If we analyze the indiceRN / SAU, the Batistuta company is the one that shows the highest value, followed dadel Piero and fan. With regard to the other two indices, the ROE and the ROI, the Ventola company can be considered as the leader, showing values ​​that are certainly above average, and above both the Del Piero and Batistuta companies. All this leads us to the conclusion that the Ventola company can be placed among the leading companies together with the other two companies already mentioned, while the Maldini company is definitely below the average and therefore it can be considered as a tail company on the basis of all the indicators considered.
At this point Angelo, intrigued by the difference found between the leading companies for the four indicators already examined, decides to seek an explanation, also on the basis of the other indicators. The DelPiero company's results are the best if compared to the working units used, while Batistuta obtains the best results, if compared to the surface used; this indicates that while in the first company the entrepreneur was able to rationalize the work factor, in the second a better rationalization of the UAA was achieved, implemented for example with the planting of more intensive crops.
Since the indicators of the Ventola company show the best results regarding both the net profitability compared to the net capital, and the operating profitability with respect to the total invested capital, this is an indication of a better rationalization of the capital, both net and invested. The fact may partly derive from the lower capitalization of the Ventola company compared to the others, especially as regards machines and equipment, while the surface and buildings in both situations are exclusively owned. The greater recourse to the passive rentals of the Ventola company cannot however cancel the advantages of the lower incidence of depreciation, indeed the Ventola company is the one that has the best RO / PLV ratio, just as it is the company in which the rotation of the capital invested is more high.
The spatial analysis also confirms the perhaps excessive availability of financial resources in the short term, to meet short-term financial needs, and a level of debt that is below the average.

Table 22 SPATIAL COMPARISONS

Index

Fan

Maldini

Del Piero

Batistuta

average

PLV / UL

33.100

29.454

35.996

34.683

33.308

PLV / SAU

1.419

1.041

1.870

2.404

1.683

RN / ULF

17.960

13.908

18.283

17.760

16.978

RN / SAU

770

492

921

1.157

835

ROE

15,6%

8,3%

14,9%

12,6%

12,8%

ROI

15,0%

7,0%

9,8%

10,5%

10,6%

RN / RO

86,8%

85,3%

97,5%

90,3%

90,0%

CI / CN

1,19

1,39

1,55

1,33

1,37

RO / PLV

62,5%

55,4%

50,5%

53,3%

55,4%

PLV / CI

24,0%

12,6%

19,4%

19,7%

18,9%

Liquid assets

2,40

0,41

0,19

0,31

0,83

Coperturafinanziaria

1,05

0,97

0,87

0,94

0,96


This is the short report that Angelo at the request of Mr. Ventola, draws up on the company examined. For display convenience, no previously examined tables have been inserted.

FAN COMPANY ACCOUNTING ANALYSIS

1993 Introduction The Ventola farm, located in a medium hilly area, run by Mr. Ventola, a direct farmer, is a medium-sized company with a 35 hectare UAA. The surface is neither irrigated nor irrigable, and the main production address is the cereal one: for the year examined, 1993, the UAA was cultivated with cereals and sunflower. The work is carried out in the company by exclusively family labor: the tenant and his wife participate in the work and overall during 1993 the labor commitment was 3300 hours equal to 1.5 UL. The company has not livestock, fodder for cuile represent a necessity rotazionale.L'azienda only from a point of view is equipped with machines and equipment which allow it to implement quasitutte cultivation practices without resorting to subcontracting, except for lamietitrebbiatura and for sowing sunflower. The analysis conducted on all the indicators made reference to the comparison with the average value of a group of homogeneous companies. For a summary of indicators deemed particularly significant (12 indices), the indices for the two previous years were subsequently reconstructed in order to also conduct a temporal analysis on the company. For the same indicators, a comparison was also made with a group of aziendesimilari, in order to highlight the company analyzed collocation rispettoalle other (spatial analysis. Without this premise on the way in which it was condottal'analisi, let us see what elements are sprung.

Structural analysis From the examination of technical parameters and from the indications provided by the entrepreneur, it appears that the Ventola company is well structured in terms of machine power, but for the most part (with the exception of the tractor and the trailer replaced recently) these are rather old vehicles, now almost completely depreciated, and which often require expensive maintenance. Compatibly with the income conditions, the examination of which will be dealt with later, it seems that a gradual renewal of the company equipment can be recommended to the entrepreneur. The fact that the company has a higher number of SAU hadi per employee, compared to the average of homogeneous companies, can be justified by a part with a greater extensification of the use of the SAU, and on the other with a better ability to organize and manage the Gentlemen Fan.

Economic analysis The overall economic management of the company seems rather good, slightly higher than the average of the reference companies (indicieconomici; indexes of profitability). The 15.6% (ROE) rate could certainly be successfully compared with bank lending rates; however, it should not be forgotten that the high value of ROE was obtained without having quantified the cost of family labor which means that if we assessed family labor at an hourly cost of £ 9,000, equal to the rate of a farm laborer in the area, the Ventola company would not obtain plus a profit, but a slight loss, and therefore one could no longer speak of ROE in positive terms. The results show an average hourly income of £ 7,955, however slightly higher than the average value.
The choice not to include the cost of labor within the reclassification of the Income Statement was a consequence of the fact that the Ventola company was compared with companies in which the extra-family labor force is practically absent. The high level of global profitability that results is determined above all by a good remuneration for extra-characteristic activities (always if one does not consider the cost of family labor), which even shows a return equal to 15%, more than 4 percentage points above the average. The ROI analysis shows that the best return on the invested capital is the result of two components, both positive:

  • the company manages to obtain higher margins on sales, thanks to a more careful control on the incidence of costs (chain of ROE and ROI);

  • it also manages to obtain greater production for the same number of investments used.

In particular, it is interesting to know which type of cost has a lower impact. To this end, examining the indexes of the NR / SAU chain and theanalysis for income statement components, there is a lower percentage of both depreciation (14.2% versus 22.6%), and of labor costs (social security costs 2.6% versus 6.7%), while variable costs (production costs) are more than average. With regard to these latter, it is possible to go down further details by analyzing the components of the income statement; in fact, it should be noted that within the variable costs the component that detaches more from the average is represented by passive rentals, which even affect more than 5% of the PLV, confirming the greater use of external services induced by the lesser mechanization of the company.
As for the level of PLV in relation to the resources used to obtain it, the resulting picture is rather unfavorable for the company examined which is below the average especially for productivity per hectare, with a difference of about 280,000 lire per hectare (catenaRN / SAU). The phenomenon is linked to the yield per hectare, attributable to the variety of cultivated wheat. The low level of PLV per ha of SAU is also the fundamental reason why Ventola also records a lower level of added value per hectare (indicieconomici), and net income per hectare (around 10% less) (RN / ULF chain).
The extracharacteristic activity, measured by the report RN / RO, causes greater negative repercussions in the Ventola company than in the average. Only 87% of operating income turns into net income, compared to an average percentage of 90%. In order to express a more precise judgment it is important to know which components and extracharacteristics cause the greatest absorption of resources. For the company examined, this is possible thanks to theanalysis by components of the income statement concerning the extracharacteristic part; it turns out that the most incident components in a negative way are interest expense and taxes and duties, which together account for almost 11% of the PLV, against 10% of the average, while the positive components (interested, working on behalf of third parties) overall do not represent that 2.3%, compared to 5% of the average, the difference in results between the company examined and the average depends on the fact that Mr. Ventola is not interested in developing a contracting activity (the machines and equipment are not suitable ), but also by the fact that too many financial charges are incurred in the company analyzed. In fact, the average cost of money borrowed (ROD) is above average (8.3% versus 5.4%) due to the presence of short-term mortgages, which have higher interest rates.

Financial analysis
Regarding the financial aspect of management, a level of debt lower than the average, but, as already said, an average cost of money higher than it (ROD). This is explained by the presence of short-term loans taken out during the year, and already partially present at the beginning of 1993, and then fully repaid before the end of the year. An important element from considerarenella financial management is the leverage effect value, the differenzacioè between ROI and ROD. Leverage is positive, which means that in addition to producing enough to compensate external lenders, there is also a margin that will benefit the entrepreneur, and therefore towards a greater overall corporate profitability. In this situation, an increase in the level of debt (for new investments, new businesses, etc.) will have positive effects on net profitability (ROE). However, this consideration must be carefully evaluated, because, as already repeated above, in the calculation of income (net and / or operating) the cost of family labor was not considered. If we had proceeded to recalculate new incomes net of the cost of family labor, we would have obtained losses and even the leverage effect would have been negative. Therefore the judgments that are expressed have their validity if they emerge from the comparison with other similar business situations. In fact, the low level of average hourly income (RN / hour) of the family workforce is common to all the other companies analyzed, in fact the Ventola company shows a slightly higher value than the reference average which leads to positive evaluations. The last consideration on the financial analysis refers to the balance in the short and medium-long term. In the short term, the Ventola company has an excess of liquidity: the amounts of money available in the short term are redundant compared to the debts assumed. It is therefore advisable to invest these excess amounts (estimated at 4 - 5 million) in alternative activities or in the financial market (BOTa three - six months). In the long run, the Ventola company shows a very satisfactory balance (financial indices): all medium-long term investments have been financed or with the entrepreneur's own means, with medium-term loans. Even more than 90% of the fixed capital was financed exclusively from the entrepreneur's own capital. The financial situation in the medium-long term seems even more solid than in the average reference.

Temporal analysis
To lead thetemporal analysis on the Ventola company we proceeded to the reconstruction of balance sheets first and then of the indices, of 1991 and 1992. The picture highlights the 1992 best birthday for the company's economic results: greater productivity (compared to both the previous year, which to the next one) there was also a greater attention to the control of production costs. Overall, however, there is a positive trend over the three years, so much so that the possibility of obtaining good results is also expected for the following years. Since, in fact, the slight decrease that occurred in some indicators in 1993 was caused in particular by the loss of productivity, while even the incidence of costs decreased, it can be assumed that, managing to obtain a greater quantity of product (in 1993 it was if you have chosen a varietal quality of granoduro which has undergone the negative influence of weather conditions), or if you manage to obtain better prices on the market, the results may even be higher than those of previous years. From a financial point of view, there is a progressive reduction in the use of external debt, even if secius cannot always be positively judged. There has also been an increase, perhaps not entirely justified, the availability of cash resources to fronteai financial requirements of the short term, resources that perhaps could be investitein most profitable forms.

Spatial analysis L 'spatial analysis has compared the Ventola company with other homogeneous companies by SAU (from 35 to 43 ha), by machine power (from 90 to 220 HP), by number of UL (from 1.3 to 3), in which there is the prevalence of family labor, in which there is no animal husbandry and there is no irrigable UAA. An analysis conducted found that the company Ventolapuò be among the best companies (head) for most of indiciconsiderati. In particular, it has achieved better results compared to equity and invested capital. This fact, however, depends on the lower capitalization of the Ventola company compared to the others, above all due to a reduced consistency of the value of machines and equipment, now rather obsolete. The noleggipassivi to which the company has to resort are a fan rispettoalle benefit other businesses that must support the units of higher fixed cost, infattil'azienda presents the best RO / PLV report, and the best rotation capitaleinvestito. But this fact will sooner or later lead to a strong increase in maintenance and repair costs as well as a loss of technical efficiency in mechanized processes which will quickly nullify the current advantage.

Final considerations
The company has achieved satisfactory economic and financial results compared to other comparison companies, with particular reference to capital solidity and the profitability of the capital invested. The results in terms of land and labor productivity were less brilliant, in part compensated by lower production costs.
In summary, the main strategic guidelines to be followed in the short period may concern:

  • the gradual renewal of company equipment, in order to avoid indifficulty with sudden breakdowns and costly maintenance also through the use of external debt, possibly at subsidized rates, and which in any case do not exceed the IROI;

  • the improvement of the company's production levels, trying to intervene on yields, appropriately choosing the varietal qualities suitable for the area, but above all intervening on the product market, perhaps also through associations and cooperation;

  • the containment, when possible, of the level of production costs, to further improve the margin on sales (RO / PLV);

  • the investment of excess cash in short-term fabbisognifinanziari business activities or in the financial market;

  • control of both markets, the factors and deiprodotti that the new EU policy addresses before deciding to take the attivitàcolturali.

The technician
Angelo Guidi


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