Understanding Key Financial Statements and Ratios
Balance Sheet Fundamentals
Assets
Non-Current Assets
- Intangible Assets: Such as application software.
- Fixed Assets: Including land, buildings, machinery, furniture, and transport. Amortization items are typically negative values.
Current Assets
- Inventories: Merchandise held for sale.
- Trade and Other Receivables: Amounts owed by clients.
- Cash and Cash Equivalents: Funds readily available in cash, bank accounts, or other liquid forms.
TOTAL ASSETS
Equity and Liabilities
Equity
- Shareholders' Equity: Comprising capital stock, legal reserves, accumulated profit or loss, and other own contributions.
Non-Current Liabilities
- Long-Term Debt: Obligations due in more than one year.
Current Liabilities
- Short-Term Liabilities: Including amounts owed to suppliers and other creditors.
TOTAL EQUITY AND LIABILITIES
Key Financial Ratios
Debt Ratio
Total Liabilities / (Total Liabilities + Equity)
An optimal net value is typically greater than 0.5.
Liquidity Ratio (Availability Ratio)
Available Funds (Cash, Bank) / Current Liabilities (Short-Term Liabilities)
Its optimum value is typically between 0.1 and 0.3.
Solvency Ratio
Current Assets / Current Liabilities
An optimal value is typically around 1.2.
Short-Term Debt Ratio
Current Liabilities / Total Liabilities
Its optimal value is typically around 0.1.
Coverage Ratio (Warranty Ratio)
Total Assets / Total Liabilities
An optimal value less than 1 indicates the firm has permanent insolvency.
Acid-Test Ratio (Quick Ratio)
(Current Assets - Inventories) / Current Liabilities
A smaller value than expected may be considered disturbing.
Profit and Loss Account (Income Statement)
- Net Turnover: The total value of sales during the financial year.
- Supplies: The cost of purchases including merchandise, components, and raw materials.
- Personnel Costs: Such as employee salaries and social security contributions.
- Other Operating Expenses: Including costs for electricity, gas, water, and telephony services.
- Amortization of Fixed Assets: Represents the loss of value due to the use of fixed assets.
- Impairment Losses and Gains/Losses on Disposals of Fixed Assets: This includes loss of value on fixed assets from items other than regular amortization (negative), and results from the sale of fixed assets (can be positive or negative).
Operating Profit/Loss
The sum of the previous concepts.
- Financial Income: Income from financial transactions, such as bank deposits.
- Financial Expenses: Costs of financial transactions, such as interest on loans.
Key Profitability Ratios
Return on Assets (ROA) / Economic Return
EBIT (Earnings Before Interest and Taxes) / Total Assets * 100
EBIT is derived from the net turnover of the profit and loss account.
Return on Equity (ROE)
Net Profit / Shareholders' Equity
Net Profit is the result from the equity and liabilities section, and Shareholders' Equity refers to the social capital from the balance sheet.