Finance Where we are? A company •Accounting point of view - generally sum of assets (investments) and liabilities (capital) • •Structure of each important • •Financial management (rules, tools) • Means and sources of a company •Means – concrete composition of the buildings, tools, inventory, accounts receivable, goodwill, know-how, money the company owns (assets) •Sources – the origin of wealth in a company (capital) Financial structure •In the balance sheet –shows structure of your assets –shows the nature of the capital (structure of financing) • • Balance sheet • Výsledek obrázku pro balance sheet Investment part Payment part Capital part TOTAL ASSETS Receivables from subscriptions Fixed assets Intangible fixed assets Incorporation expenses Research and development Software Valuable rights Goodwill ( +/- ) Other intangible fixed assets Intangible fixed assets under construction Advance payments for intangible fixed assets Tangible fixed assets Land Constructions Equipment Perennial corps Breeding and draught animals Other tangible fixed assets Tangible fixed assets under construction Advance payments for tangible fixed assets Adjustment to acquired assets Long-term financial assets Shares - controlled organizations Shares in accounting units with substantial influence Other securities and shares Loans to controlled and controlling organizations and to accounting unit with substantial influence Other financial investments Financial investments acquired Advance payments for long-term financial assets Current assets Inventory Materials Work in progress and semi-products Finished products Animals Merchandise Advance payments for inventory Long-term receivables Trade receivables Receivables from controlled and controlling organizations Receivables from accounting units with substantial influence Receivables from partners, cooperative members and association members Long-term deposits given Estimated receivable Other receivables Deffered tax receivable Short-term receivables Trade receivables Receivables from controlled and controlling organizations Receivables from accounting units with substantial influence Receivables from partners, cooperative members and association members Receivables from social security and health insurance Due from state - tax receivable Short-term deposits given Estimated receivable Other receivables Short-term financial assets Cash Bank accounts Short-term securities and ownership interests Short-term financial assets acquired Accruals Deferred expenses Complex deferred costs Deferred income TOTAL LIABILITIES Equity Registered capital Registered capital Company´s own shares and ownership interests (-) Changes of registered capital ( +/- ) Capital funds Share premium Other capital funds Diferences from revaluation of assets and liabilities ( +/- ) Diferences from revaluation in tranformation of companies ( +/- ) Differences from transformation of companies (+/-) Diferences from valuation in transformation of companies (+/-) Reserve funds, statutory reserve account for cooperatives, and other retained earnings Legal reserve fund / indivisible fund Statutory and other funds Profit / loss - previous years Retained earnings from previous years Accumulated losses from previous years Other profit / loss - previous years Profit / loss - current year (+/-) Other sources Reserves Reserves under special statutory regulations Reserves for pension and similar payables Income tax reserves Other reserves Long-term payables Trade payables Payables to controlled and controlling organizations Payables to accounting units with substantial influence Payables from partners, cooperative members and association members Long-term advances received Issues bonds Long-term notes payables Estimated payables Other payables Deffered tax liability Short-term payables Trade payables Payables to controlled and controlling organizations Payables to accounting units with substantial influence Payables from partners, cooperative members and association members Payroll Payables to social securities and health insurance Due from state - tax liabilities and subsidies Short-term deposits received Issued bonds Estimated payables Other payables Bank loans and financial accomodations Long-term bank loans Short-term bank loans Short-term accomodations Accruals Accrued expenses Deffered revenues Balance sheet • Výsledek obrázku pro balance sheet Investment part Payment part Capital part Assets 1 of 2 •Fixed assets (investment assets) –Usage longer than 1 year –Is subject do depreciation •Current assets (operating) –Various forms (material, money, accounts payable) –Still changing from one form to another –Indicator - Absolute liquidity – ability to change to be used as a payment method • Assets 2 of 2 •Assets structure is derived from: –sector and branch of industry •(technology, standard values, …) – –financial policy of the company •(aggressive, defensive, strength, …) Equity •represents what shareholders own, so it is often called shareholder's equity. •Equity = Total Assets – Total Liabilities •The two important equity items are paid-in capital and retained earnings. • Liabilities •There are current liabilities and non-current liabilities. •Current liabilities are obligations the firm must pay within a year, such as payments owing to suppliers. •Non-current liabilities, meanwhile, represent what the company owes in a year or more time. Typically, non-current liabilities represent bank and bondholder debt. • Investment and financing Definition •Investing = bonding the capital in the assets (allows a production process in terms of revolution of current assets) • •Financing = raising money for a business, obtaining capital • Investing on start (assets part) •Planning necessary think and calculate • Obsah obrázku snímek obrazovky Popis byl vytvořen automaticky Investing in between (assets part) •Technical vs. Economical lifespan •Technical –How long can machine produce flawless goods •Economical –How long is effective to use the machine according to: •Operating costs •Revenues higher than interest rate •Taxes Investment calculation •Static 1.Cost comparison 2.Profit comparison 3.Profitability comparison 4.Payback comparison •Dynamic 1.Net present value (NPV) 2.Internal rate fo return (IRR) • Static 1.Cost of purchase + cost of planned lifespan –(must be same capacity, profit not shown) 2.Profit – comparison of expected profit 3.Profitability – ROA, ROE, ROS 4.Payback of additional costs = •(Cost 2 – cost 1) / (operating cost 1 – operating cost) • 1. 1. Dynamic (NPV) •NET PRESENT VALUE Dynamic (IRR) •Internal rate of return – NPV = 0 Financing (capital part) •Own capital (equity) •Foreign capital (liabilities – debt, credit…) •Alternatives – leasing • •Strategic planning and calculating necessary (there are rules) • • Financing •Debt financing vs. Equity financing •Debt financing (capital) – source of investment rely on borrowed funds •Sources of debt capital: banks, credit unions, relatives and friends •Equity financing (capital) – selling shares of the company to investors •Sources of equity capital: relatives and friends, business angels and venture capitalists, partners Key planning factors of capital •Own sources (equity) –Will of owners to invest –Legal necessity –Profit generation ability –Dividend policies (profit parting) •Foreign sources (debt) –Long term liabilities (mother company) –Short term liabilities (terms of payments of accounts payable and receivable) –Sum of liabilities of the company (for accepting further credit) • Financing (rules 1) •Gold rule of financing •There should be match between the time of the bonding of the capital in assets and the time of the availability of the capital for their purchase • • •Gold balance rule •narrow definition – fixed assets should be financed by equity, current assets by debts •wide definition – fixed assets should be financed by long term debts, current assets by the short term ones • Financing (rules 2) •Vertical capital structure •Share among the equity and foreign capital should be 1:1 (leverage ratio – debt to equity) • Financing (rules 3) •assets = liabilities •long term assets = long term liabilities •long term assets = own capital • •Foreign capital = own capital •ROE! • Financial statements 1 •So far we have been talking about balance sheet (the structure of assets and liabilities) Financial statements 2 •There are also –Profit and loss statement –Cash flow statement –Annual report –Auditor comment Profit and loss statement •Shows how the assets are working in you company – effectivity •Revenue – expenses = Income •Measure the performance over specific period of time • Cash flow statement •Shows how stable you are in the short run. •Shows inflow and outflow of money. • Annual report and auditor comment •Annual report –Describes what really happened in the company, what were the plans, what is the accounting standard etc. •Auditor comment –Verifies that statements are ok from point of accounting accuracy etc. • • Financial statements 3 •All of them are very important source of information about what happened in your company. •In the Czech Republic – companies in business register of specific size MUST publish statements! •Used for tax purposes •Used for financial planning •Used for financial analysis… Financial analysis Sources of information •Accounting of a company (reliable, auditors chamber revision) •National statistics •Statistics of ministries/departments •Accounting of competition Obsah obrázku objekt, hodiny Popis byl vytvořen automaticky „Meating“ a problem Obsah obrázku objekt, hodiny Popis byl vytvořen automaticky •Verified accounting does NOT mean that you have no problem and it will be easy •Accounting standards are different across Europe •Czech Standards vs. __________ standards vs. IFRS vs. US GAAP Sources case study in the Czech Republic •www.justice.cz – business register with financial data of competition and…. you! •Mpo.cz – Ministry of industry and trade (sector statistics for industry) •www.czso.cz Czech statistical office •www.magnusweb.cz – source of financial data of competition •Bloomberg terminal FEA MU – source of financial data • Full financial analysis steps 1.Absolute indicators analysis (percentage, vertical analysis) 2.Calculation of relative indicators (ratios) 3.Comparison of these indicators (rations) to business sectors and branches (how?) 4.Evaluation of indicators and values in time (trends, horizontal analysis) 5.Evaluation of relations of these indicators (USA Du-Pont, CZE – pyramid settings of indicators) 6.Analysis of strengths and weaknesses and proposal of measures 7. 7. Financial analysis •For evaluation of financial health •Indicators of rentability and profitability •Indicators of debtness •Indicators of solvency •Indicators of external market evaluation • 1. Absolute indicators •Percentage of fixed assets and current assets –Is your company capitally strong of weak? –What is structure of your assets? –Is there any risk of bancrupcy? –What should we prioritize in planning? –Do I make profit? (just yes/no answer, but does not show how good I am) • 2. Calculation of relative indicators (ratios) •THIS IS THE CORE OF FINANCIAL ANALYSIS •For evaluation of financial health –Indicators of profitability and profitability –Indicators of activity –Indicators of debtness (financial leverage) –Indicators of solvency (liquidity) –Indicators of external market evaluation • Profitability •Relation between investment and return •Simple fraction but… •What is return? •Return is earning? •Which one? • Earning Earing before interests, taxes, depreciation and amortization (EBITDA) -Depreciation and amortization Earning before interest and taxes (EBIT) -Interests Earning before taxes (EBT) -Taxes Earning after taxes (EAT) Profitability ratios •ROA = EBIT/assets –(how profitable my assets are) •ROS = EAT/sales –(how good I am in the comparable industry) •ROE = EAT/equity –(how much I earn of my money) •ROCE, ROI, RO…..whatever •Optimal? Higher the better… Activity 1 of 2 •General activity indicator •Turnover of total assests = sales(revenues) / total assest –(productivity of assets, Optimal: good if ≥1) • •Financial and production indicators (important in shops) •Turnover of current assets = sales/ current assets (mostly inventory = inventory turnover – „number of purchasing to warehouse“) •Time of turnover = 365/turnover of current assets •Optimal depends on industry and technology. • • • Activity 2 of 2 •Financial stability (cash flow)! –Turnover ratio of accounts payable (TAP) and turnover ratio of accounts receivable (TAR) •TAP (TAR) = sales / average AP(AR) •Time of turnover = 365/TAP •Optimal? TAP ≥ TAR Debtness (financial leverage) 1 of 2 •Related to the extend to which a firm relies on debt financing rather than equity, Important! – Who is the creditor! •Debt ratio (creditor risk) = total debts / total assets –(risk ratio for anybody to lend you money) •Leverage(debt to equity) = equity / foreign capital –(Is your company stable and still “yours”?) •Interest coverage = Earning (EBIT) / interest expense –(Are you able to cover necessary expenses or have to sell building? L ) Debtness (financial leverage) 2 of 2 •Optimal? According to rules of capital structure! •Debt ratio (creditor risk) ≤ 1 • •Leverage(debt to equity) = 1 : 1 •(standard world-wide - 60:40) • • • • TERM - Liquidity •Liquidity (absolute)- describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's (investopedia.com) • •Liquidity (relative) – ability of the company to pay all accouts payable in the proper terms Indicators of solvency (liquidity) 1 of 3 •Ability of a company to fulfil the requested payment on time (pay off accounts payable) •Based on relation of current assets and short term liabilities •Short term liabilities (accounts payable) •usually from core business activity •Liabilities to external subjects • Indicators of solvency (liquidity) 2 of 3 •Current ratio = current assets/ short term liabilities • •Quick ratio (acid test) = (current assets-inventory)/ short term liabilities • •Cash ratio = financial assets (cash, bank account)/ short term liabilities Indicators of solvency (liquidity) 3 of 3 •Optimal? Depends on strategy… • aggresive normal defensive cash 0,2 0,2 0,2 quick 0,4-0,7 0,7-1 1-1,5 current under 1,6 1,6-2,5 over 2,5 Indicators of external market evaluation •Only for marketed companies (in CZE 19 companies) •P/E ratio – price/earning ratio = market price of share/ EAT per share • •Share rate (market/book ratio) = market price/nominal price (book value) • •EAT per share (EPS) = EAT/number of shares • •Dividend yield = dividend/share price 3. Comparison of these indicators (rations) to business sectors and branches (How?) •Find appropriate competition, fnd average industry values…then compare –www.justice.cz – business register with financial data of competition and…. you! –Mpo.cz – Ministry of industry and trade (sector statistics for industry) –www.czso.cz Czech statistical office –www.magnusweb.cz – source of financial data of competition –Bloomberg terminal FEA MU – source of financial data • • 4. Evaluation of indicators and values in time (trends, horizontal analysis) •What it means? •What is the reality? •What happened? •What can be done? 5. Evaluation of relations of these indicators (USA Du-Pont, CZE – pyramid settings of indicators) •Basically disassembling the top level indicator to individual indicators, used for analysis of sensitivity of top level indicator Obsah obrázku snímek obrazovky Popis byl vytvořen automaticky Obsah obrázku snímek obrazovky Popis byl vytvořen automaticky 6. Analysis of strengths and weaknesses and proposal of measures •Problems? •How to solve them? •Do we have adequate means to solve it? Common problems •Low profitability – too much assets •Bank will not finance us – too much debt •We can not pay employees – liquidity •Are we having a lot of assets? •Sell off, factoring, reversal leasing… •Thank you