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Essential Financial Statement Analysis & Key Accounting Ratios

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Balance Sheet Components

Assets

Current Assets

  • Assets that can be converted into cash within one year, excluding tangible assets, intangible assets, accumulated depreciation, and financial investments.
  • Examples:
    • Inventory: Merchandise, raw materials, finished goods.
    • Receivables: Customers, debtors.
    • Cash & Equivalents: Cash on hand, bank balances.

Equity and Liabilities

Equity

  • Includes capital, retained earnings (Profit and Loss Account), and reserves.

Non-Current Liabilities (Long-Term)

  • Obligations due in more than one year.
  • Examples: Long-term suppliers, long-term debts, long-term lenders.

Current Liabilities (Short-Term)

  • Obligations due within one year.
  • Examples: Suppliers, short-term creditors, short-term debt, short-term lenders, financial obligations, Social Security contributions.

Income Statement: Expenses and Revenues

Expenses

Operating Expenses

  • Merchandise purchases, raw material purchases, purchase rebates/discounts, inventory variation, discounts granted, salaries and wages, rents, intangible asset amortization, insurance.

Financial Expenses

  • Interest on debt, dividends paid on shares.

Revenue

Operating Revenue

  • Merchandise sales, sales rebates/discounts, other operating revenue.

Financial Revenue

  • Rental income, interest income.

Profitability Calculation Breakdown

  • Operating Profit (EBIT - Earnings Before Interest and Taxes): Operating Revenue - Operating Expenses
  • Profit Before Tax (PBT): Operating Profit + Financial Income - Financial Expenses
  • Net Profit: Profit Before Tax - Taxes

Key Financial Health Indicators

  • Solvency Ratio below 1: Indicates a high risk of company bankruptcy.
  • Current Ratio below 1: Suggests a liquidity issue, potentially leading to insolvency.
  • Negative Working Capital (FM): Signifies a critical situation of insolvency or inability to meet short-term obligations.

Working Capital (Fondo de Maniobra - FM)

  • Formula 1: FM = Current Assets (AC) - Current Liabilities (PC)
  • Formula 2: FM = Permanent Resources (RP) - Fixed Assets (AF)

Essential Financial Ratios

  • Liquidity Ratio (Current Ratio): AC / PC (Current Assets / Current Liabilities)
  • Cash Ratio: Available Cash / PC (Available Cash / Current Liabilities)
  • Solvency Ratio: AR / (PC + PNC) (Total Assets / Total Debt - Current + Non-Current Liabilities)
  • Debt-to-Equity Ratio: (PC + PNC) / Pat.Net (Total Debt / Shareholder's Equity)
  • Debt Structure Ratio: PC / (PC + PNC) (Current Liabilities / Total Debt)

Inventory and Cost of Goods Sold (COGS)

  • Cost of Goods Sold (COGS): Purchases + Inventory Variation
  • Inventory Variation: Initial Inventory (Ei) - Final Inventory (Ef)

Average Operating Cycle (MMP)

  • MMP = Sales Period (SPV) + Manufacturing Period (SPF) + Provisioning Period (Spa) + Billing Period (SPC) - Payment Period (SPP)

Key Rotation Ratios

  • Supplier Payment Rotation: Purchases of Raw Materials / Average Balance of Suppliers
  • Customer Turnover (Accounts Receivable Turnover): Sales / Average Customer Balance
  • Provisioning Rotation: Consumption / Average Balance of Raw Materials or Average Stock Balance
  • Manufacturing Rotation: Production Cost / Average Balance of Finished Product
  • Sales Turnover (Accounts Receivable Turnover): Sales / Average Client Balance

Period Ratios (Days)

  • Supplier Payment Period (SPP): 365 or 360 / Supplier Payment Rotation (rp)
  • Customer Billing Period (SPC): 365 or 360 / Customer Turnover (rc)
  • Provisioning Period (Spa): 365 or 360 / Provisioning Rotation (ra)
  • Manufacturing Period (SPF): 365 or 360 / Manufacturing Rotation (rf)
  • Sales Period (SPV): 365 or 360 / Sales Turnover (rv)

Break-Even Analysis (Single Product Firms)

Key Terms:

  • QV: Quantity Sold
  • Pv: Sales Price per Unit
  • VC: Total Variable Cost
  • Cvu: Unit Variable Cost
  • CF: Total Fixed Cost

Break-Even Point Calculation:

  • The break-even point is where total revenue equals total costs (Revenue - Costs = 0).
  • QV * Pv - (CF + VC) = 0
  • QV * Pv - (CF + Cvu * QV) = 0
  • QV * Pv - CF - Cvu * QV = 0
  • QV * (Pv - Cvu) = CF
  • Break-Even Quantity (QV): CF / (Pv - Cvu)

Contribution Margin per Unit:

  • Contribution Margin per Unit: Pv - Cvu (Selling Price per Unit - Unit Variable Cost)

Break-Even Table Example:

This table illustrates how revenue and costs change with quantity (Q):

Quantity (Q)Income (Pv * Q)Cost (CF + Cvu * Q)
.........

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