Financial Statement Analysis

A Case Study Approach

Ragheno Business Park

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Responsible publisher : Hans Suijkerbuijk, Ragheno Business Park, Motstraat 30, B-2800 Mechelen

© 2011, Wolters Kluwer Belgium

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Wettelijk depot : D/2011/2664/662

ISBN : 978-90-4653-880-7
BP/FINANWE-BI11001
 TABLE OF CONTENTS

CHAPTER 1
The financial statements or the annual accounts 13
1.1. Introduction 13
1.2. Generally accepted accounting principles and the financial statements 13
1.3. Basic assumptions 14
1.3.1. Business entity 14
1.3.2. Going concern 15
1.3.3. Consistency 15
1.3.4. Monetary unit 17
1.4. Reporting principles 17
1.4.1. Time-period principle 17
1.4.2. Comparability 18
1.4.3. Faithful representation 18
1.5. Measurement 18
1.6. Public annual accounts 19
1.6.1. Principle 19
1.6.2. Which enterprises have to file a set of annual accounts with the central
balance sheet office? 19
1.6.3. Format of the annual accounts 19
1.6.4. Special topics 20
1.7. Consultation of annual accounts 21

CHAPTER 2
Analysis of the annual accounts: the preparatory phase 23
2.1. The purpose of financial analysis 23
2.2. Techniques of financial analysis 23
2.3. First screening of the annual accounts 24
2.3.1. Introduction 24
2.3.2. Screening of the balance sheet 24
2.3.3. Screening of the income statement 24
2.3.4. The case of DHZ 25
a. Introduction 25
b. Screening of the assets 26
c. Screening of the liabilities 28
d. Screening of the income statement 30
e. Screening appropriation account 30
2.3.5. Supplementary information from the annual management report 31
2.4. DHZ in figures 32
2.5. Reorganising the balance sheet and income statement 35
2.5.1. Introduction 35
2.5.2. Reorganising the balance sheet 35
2.5.3. Reorganising the income statement 36
2.5.4. The cash flow 37
2.6. Vertical and horizontal analysis 37
2.6.1. Vertical analysis 37
2.6.2. Horizontal analysis 41
a. Horizontal analysis based on absolute changes 41
b. Horizontal analysis based on relative changes 41

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c. Horizontal analysis based on time series 41

2.6.3. Analysis of the annual accounts of DHZ (vertical and horizontal analysis) 45
a. Assets 45
b. Liabilities 46
c. Income statement 46

CHAPTER 3
Analysis of short-term liquidity 47
3.1. Concepts 47
3.2. Working capital 47
3.2.1. Definition and formula 47
3.2.2. Structure 48
3.2.3. Remarks 48
3.2.4. Calculation of DHZ’s net working capital 50
3.2.5. Interpretation of DHZ’s net working capital 50
3.3. Need for working capital 51
3.3.1. Definition and formula 51
3.3.2. Structure 51
3.3.3. Remarks 51
3.3.4. Calculation of DHZ’s need for net working capital 53
3.3.5. Interpretation of DHZ’s need for net working capital 53
3.4. Cash ratio 53
3.4.1. Definition and formula 53
3.4.2. Structure 54
3.4.3. Remarks 54
3.4.4. Calculation of DHZ’s cash ratio 58
3.4.5. Interpretation of DHZ’s cash ratio 58
3.5. Current ratio 58
3.5.1. Ratio 58
3.5.2. Structure 59
3.5.3. Remarks 59
3.5.4. Calculation of DHZ’s current ratio 59
3.5.5. Interpretation of DHZ’s current ratio 59
3.6. Quick ratio 60
3.6.1. Ratio 60
3.6.2. Structure 60
3.6.3. Remarks 60
3.6.4. Calculation of DHZ’s quick ratio 61
3.6.5. Interpretation of DHZ’s quick ratio 61
3.7. Stock turnover period 61
3.7.1. Concept 61
3.7.2. Ratios 61
3.7.3. Structure 62
3.7.4. Remarks 63
3.7.5. Calculation of DHZ’s stock turnover period 63
3.7.6. Interpretation of DHZ’s stock turnover period 64
3.8. Settlement period for trade debtors 64
3.8.1. Ratio 64
3.8.2. Structure 64
3.8.3. Remarks 65
3.8.4. Calculation of DHZ’s average settlement period for trade debtors 65

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3.8.5. Interpretation of DHZ’s average settlement period for trade debtors 65

3.9. Settlement period for suppliers 66
3.9.1. Ratio 66
3.9.2. Structure 66
3.9.3. Remarks 66
3.9.4. Calculation of DHZ’s average settlement period for suppliers 66
3.9.5. Interpretation of DHZ’s average settlement period for suppliers 67
3.10. Summary 67

CHAPTER 4
Analysis of cash flows 69
4.1. Purposes 69
4.2. Concepts 69
4.2.1. General 69
4.2.2. Available and raised cash on the short term 69
4.2.3. Change 70
4.2.4. Transactions 70
a. Operating activities 70
b. Investing activities 71
c. Financing activities 71
4.3. Calculating cash flows: different methods 71
4.4. Calculating cash flows: an illustration 72
4.5. Direct method 79
4.6. Indirect method 80
4.7. Calculation of cash flow resulting from operating activities 86
4.8. Case study DHZ 90
4.9. Cash flow resulting from investing activities 92
4.10. DHZ’s cash flow resulting from investing activities 98
4.11. Cash flow resulting from financing activities 99
4.11.1. General 99
4.11.2. Calculation of real changes of the equity capital 103
4.11.3. Calculation of real changes of long-term and short-term financial debts 104
4.12. Cash flow resulting from DHZ’s financing activities 105
4.13. Total cash flow of DHZ 106
4.14. Importance and use of the cash flow survey 107

CHAPTER 5
Analysis of profitability 109
5.1. Concepts 109
5.2. Return on Sales (ROS) 109
5.2.1. General 109
5.2.2. Ratios 110
a. Gross ROS 110
b. Net ROS 110
5.2.3. Remarks 111
5.2.4. Calculation of DHZ’s Return on Sales 111
5.2.5. Interpretation of DHZ’s Return on Sales 112
5.3. Return on Assets (ROA) 112
5.3.1. General 112
5.3.2. Return on Operating Assets 112
a. General 112

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b. Ratios 112
c. Structure ratios 113
d. Remarks 113
e. Calculation of DHZ’s Return on Operating Assets 114
f. Interpretation of DHZ’s Return on Operating Assets 114
5.3.3. Return on Total Assets (ROA) 115
a. Ratios 115
b. Structure ratios 116
c. Remarks 117
d. Calculation of DHZ’s ROA 118
e. Interpretation of DHZ’s ROA 118
5.4. Return on Equity (ROE) 119
5.4.1. General 119
5.4.2. Ratio 119
5.4.3. Structure ratio 119
5.4.4. Remarks 120
5.4.5. Calculation of DHZ’s ROE 120
5.4.6. Interpretation of DHZ’s ROE 120
5.5. ROE: Alternative approach 121
5.6. Added Value 121
5.6.1. Gross Value Added (GVA) by origin 121
a. General 121
b. Ratio 121
c. Structure ratio 121
d. Remarks 121
5.6.2. Gross Value Added Margin 122
a. Ratio 122
b. Structure ratio 122
c. Remarks 122
5.6.3. Gross Value Added by allocation 123
a. Ratios 123
b. Structure ratio 123
c. Remarks 124
5.6.4. Gross Value Added and personnel 125
a. Ratio 125
b. Structure ratio 125
c. Remarks 125
5.6.5. Calculation of DHZ’s Gross Value Added 125
5.6.6. Interpretation of DHZ’s Gross Value Added 127
5.7. Summary 127

CHAPTER 6
Analysis of the financial structure 129
6.1. Concept 129
6.2. Financial independence 129
6.2.1. Ratios 129
6.2.2. Structure of the ratios 130
6.2.3. Remarks 130
6.2.4. Calculation DHZ 133
6.2.5. Interpretation DHZ 133
6.3. Financing stability 134

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6.3.1. Ratio 134

6.3.2. Structure of the ratio 135
6.3.3. Remarks 135
6.3.4. Calculation DHZ 136
6.3.5. Interpretation DHZ 136
6.4. Debt redemption capacity 137
6.4.1. Ratio 137
6.4.2. Structure of the ratio 137
6.4.3. Remarks 137
6.4.4. Calculation DHZ 138
6.4.5. Interpretation DHZ 138
6.5. Rights and commitments (not in balance sheet) 138
6.6. Capital gearing or capital leverage 139
6.6.1. Ratio 139
6.6.2. Structure of the ratio 140
a. In general 140
b. Capital gearing as a sum 140
c. Capital gearing as multiplier 142
6.6.3. Remarks 143
6.6.4. Calculation DHZ 143
6.6.5. Interpretation DHZ 143
6.7. Summary 144

Appendices 145
1. Annual account DHZ 145
2. Additional information DHZ’s Financial statements 190

Bibliography 195

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