Financial Statement Analysis: Interpreting Key Changes
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Balance Sheet: Interpreting Changes
| Item | Implication |
|---|---|
| Cash | ↑ More liquidity (Good) / ↓ Spent or not collecting (Check) |
| Inventory | ↑ Buying stock, slow sales (Risk) / ↓ Selling well (Good) |
| Receivables | ↑ Sold more but unpaid (Cash risk) / ↓ Collecting faster (Good) |
| PPE (Fixed Assets) | ↑ Investing in growth (Good) / ↓ Depreciation or selling (Neutral) |
| Payables | ↑ Buying on credit (Managed) / ↓ Paying faster or buying less |
| ST Debt | ↑ Borrowing (Repayment pressure) / ↓ Repaid or renegotiated (Good) |
| LT Debt | ↑ Long-term loans (Investment) / ↓ Repaying debt (Lower risk) |
| Equity | ↑ Profit kept or capital raised (Good) / ↓ Losses or dividends (Risk) |
| Equity % | ↑ Less debt-dependent (Stable) / ↓ More leveraged (Risk) |
Income Statement: Performance Indicators
| Item | Implication |
|---|---|
| Revenue | ↑ Selling more/higher prices / ↓ Losing clients or price cuts |
| Gross Margin % | ↑ Better pricing/cheaper production / ↓ Rising costs |
| EBIT Margin % | ↑ Efficient operations / ↓ Operating costs ballooning |
| Net Margin % | ↑ More profit per euro / ↓ Taxes, interest, or losses |
| D&A | ↑ Higher fixed asset investment (Normal) |
| Financial Expenses | ↑ More debt/higher rates (Eats profit) / ↓ Paying down debt |
Cash Flow Statement: Working Capital & Signals
- Inventory ↑: - Cash (Used cash for stock)
- Inventory ↓: + Cash (Sold stock)
- Receivables ↑: - Cash (Uncollected sales)
- Receivables ↓: + Cash (Collected invoices)
- Payables ↑: + Cash (Delayed payment)
- Payables ↓: - Cash (Paid suppliers)
- D&A: Always + Cash (Non-cash expense)
- CFO < Net Income: Low quality earnings (Not collecting cash)
- CFO ≈ Net Income: High quality earnings (Real cash profit)
CFI & CFF Signals
- CFI Negative: Investing in assets (Growth signal)
- CFI Positive: Selling assets (Shrinking or raising cash)
- CFF Positive: Raised capital or loans
- CFF Negative: Repaying debt or paying dividends (Mature)
Financial Analysis Formulas
Analysis Tools
- Vertical Analysis: (Item ÷ Total Assets/Sales) × 100
- Horizontal Analysis: ((Year N - Base Year) ÷ Base Year) × 100
- Equity/Debt %: (Equity or Liabilities ÷ Total Assets) × 100
Income Statement Cascade
- Gross Margin: Sales - COGS
- EBITDA: Gross Margin - OpEx
- EBIT: EBITDA - D&A
- Net Income: Pre-tax Income - Tax
Cash Flow & FCF
- CFO (Indirect): Profit + D&A ± Δ Working Capital - Interest - Tax
- FCF: NOPAT - Δ NOA
- Net Cash Check: CFO + CFI + CFF = Δ Cash (Must match BS)