FINANCIAL ANALYSIS

• Objective: evaluation of stability degree or

financial equilibrium in the company.
• Steps:
– Principle of financial equilibrium.
– Static analysis (situation of the company).
– Dynamic analysis (company evolution).
 FINANCIAL EQUILIBRIUM
• ASSETS
– Liquidity trend (fixed and current assets)
• LIABILITIES
– Trend to demand payments (short and long term
debt)
• Liquidity degree in asset investments should
always be equal or higher than demand payments
liabilities.
 STATIC ANALYSIS
• Company financial situation.
• Main financial ratios:
– Financial leverage.
– Solvency.
– Liquidity.
 STATIC ANALYSIS
• Financial leverage ratio:
• Total Debt / Total Liabilities
• Management tool, risk position.
» D < 50% Conservative.
» 50% < D < 60% Moderate.
» D > 60% High.
 STATIC ANALYSIS
• Financial leverage quality:
– Demand payments degree: analyse the proportion
between short and long term debt.
– Kind of investments to finance.
– Kind of creditors, negotiating capabilities.
– Revolving credit conditions to current assets
financial needs.
 STATIC ANALYSIS
• Solvency:
– Capability to pay on time the whole short term
financial requirements.
– Solvency ratio:
• Total Current assets / Short term debt
• Ratio should be higher than 1, but it is also important
to analyse working capital conditions to evaluate
actual capacity to pay on time.
 STATIC ANALYSIS
• Liquidity:
– Liquid short term guaranties degree to cover
current assets.
– Liquidity ratio:
• (Account receivables + cash) / Current liabilities
• Although ratio is recommended to be higher than 1,
it will also depend on collection and payment
conditions as well as the kind of inventories.
 DYNAMIC ANALYSIS
• Company development evaluation from the
financial point of view.
• Identify main changes in investment and
financing.
• Applications and sources of financing outline.
 DYNAMIC ANALYSIS
• Applications • Sources of financing
– Fixed assets. - Sellingassets.
– Current assets. - Capital increase .
- Short and long term
– Credit cancellations. loans.
– Loses. - Profits.
- Depreciation.
 DYNAMIC ANALYSIS
• Applications and Sources of Financing Outline:
– Explain WHAT the company has done -
applications- and HOW -sources of financing-.
– Evaluate stability degree in the company
development.
 WORKING CAPITAL
• Capabilities and financial implications basically
depend on business operating conditions.
• Main phases:
– Supply (warehouse management).
– Account payables (suppliers financing).
– Account receivables (customers collecting).
 WORKING CAPITAL
• The optimum working capital management
consists in minimizing investment
requirements and its financial needs.
• Basic assumption: the more time the company
may spend in the operating cycle, the higher
financial needs will appear.
 WORKING CAPITAL
• ¿How could we measure the average time the
company needs in each operating phase?

– Supply (days´ inventories): average time since the

product gets in warehouse until it is consumed.
• (Inventories / Consumption) x 365
 WORKING CAPITAL
• ¿How could we measure the average time the
company needs in each operating phase?

– Account payables: Payment time to suppliers.

• (Account payables / Purchases) x 365
– Account receivables: Collection time to customers.
• (Account receivables / Sales) x 365
 WORKING CAPITAL
• Working capital management affects
substantially to the company solvency and
financial needs.
• Analyse current assets evolution in the own
company and also compare it with other
companies in the same business sector.
 ECONOMIC ANALYSIS
• USALI: Uniform System of Accounts for the
Lodging Industry (Profit & Loss Statement)
• Hotel departments can be classified into three main groups:
– Operating departments
• Room services, Food & Beverage, other services or activities (fitness, conference
room rental,…) to generate income.
– Overheads
• Indirect departments (administration, marketing, IT, maintenance ...) necessary for
the activity of the hotel but do not generate income, only account costs.
– Non operating departments
• Not assignable costs (insurance, rentals, depreciation,…), not manageable costs by
the hotel manager, but by the board of directors.
 ECONOMIC ANALYSIS
• Summary Operating Income Statement
• Margin analysis:
– Gross Margin or Gross Operating Income, GOI Hotel
• Net sales - Variable costs
– Net Operating Profit, NOP Hotel (EBIT)
• GOI - Fixed costs

• Break even point

• Fixed costs / GOI
 ECONOMIC ANALYSIS
• Main objective: evaluate the capability of
generating profits in terms of profitability.
• Profitability concept is always expressed as a
proportion between profits and the
investment needed.
 ECONOMIC ANALYSIS
• Two main profitability ratios should be
differentiated: operating and financial.
• Financial leverage establishes the relationship
between both ratios and explains possible
differences.
 ECONOMIC ANALYSIS
• Operating • Financial profitability,
profitability, R.O.A., R.O.E., shareholders
economical outlook outlook:
related to business • E.A.I.B.T / Equity
activity:
• E.B.I.T. / Total Assets
 ECONOMIC ANALYSIS
• Financial leverage and financial profitability
relationship:
- As far as ROA is higher than financial
expense rate, ROE will be increased.
- When ROA becomes lower than financial
expense rate, ROE will be decreased.

• Practical problems to take leverage decisions.