Family business characteristics in Slovenia

Transcription

1 Family business characteristics in Slovenia Appendix Contents Description of financial indicators Indicators of the state of financing The indicators of the state of investing Indicators of horizontal financial structure...3 Turnover indicators Indicators of economic performance Profitability indicators Indicators of the income Indicators of the operational cash flow D e s c r i p t i o n o f financial indicators The perspective of the company depends largely on whether the company is capable to meet its obligations on both the short and the long term. The financial health of the company is assessed through the structure of its assets and in terms of the time frame as shown on a certain date in the balance sheet. The indication of how the company with its operations created a property out of the assets at the beginning of the observation period and stated in the balance sheet at the end of the observation period is shown as the revenue generated and expenditures made in the period observed in the income statement. In the analysis of the income statement, we are primarily interested in the success of the company, cost structure and sales volume and trends in their values. Determination of success is extremely important because it indicates the work in the company, allowing for a correction of consequences and a prevention of the causes that may lead to the failure of the company. In analyses on the basis of the income statement and balance sheet several financial indicators are used, some of them presented below¹.

2 Indicators of the state of financing Non-proprietary financing of of the company shows the share of debt in, which is calculated by the following formula: The rate of debt financing = debt As debt should be considered values of long-term and short-term in the balance sheet. The above indicator shows what proportion of assets of the company is financed with debt capital which requires regular interest payments and, therefore, pose a greater burden or liability for the company than equity. This indicator is very important for creditors who want to assess how much risk is involved as regards the repayment of loans and how would the allocation of an additional loan affect the financial risk of the company. The higher the use of debt as a cheaper source of financing, the higher profitability can expect by owners of capital. Increasing debt instead of increasing capital by the non-owners allows existing owners to maintain control of the company². The higher the value of the above indicator therefore represents a significant financial risk to creditors and at the same time a higher return on equity. The lower value of this indicator expresses a safe financial policy of the company, which reduces the risks involved in its operations, but the owners have more difficulty to achieve a greater return on capital invested in the company, but it is stable. Too low a value of this indicator may mean an irrational financing of assets with more expensive sources of financing, especially if the interest rate on the loan is lower than the planned return on equity. The share of short-term, i.e. those debts that are due for payment in less than one year in total are reflected in: The rate of short term financing = short-term debts (including shortterm accrued deferred expenses) The low value of this indicator points to a conservative financial policy of the company, since a lower proportion of short-term in total reduces the risk of shortterm insolvency and ensure long-term solvency of the company. The share of the accumulated profit in funding sources tells us what proportion of assets of the company is financed by the balance sheet accumulated profit: accumulated profits The share of accumulated profits in = The share of bank loans in financing sources tells us what proportion of assets of the company is financed with short-term and long-term bank loans: financial to banks The proportion of financial to banks in = 2 Family business characteristics in Slovenia A p p e n d i x

3 The indicators of the state of investing In technology-intensive industries (for example, mining, some manufacturing, supply of gas, electricity, water, etc.) is the share of fixed assets in total assets usually greater than in labor-intensive activities (for example, trade, services, etc.). High-tech companies have in assets a high share of fixed assets but because of that also the high proportion of fixed costs in total costs and a high proportion of the value of depreciation. Due to the low speed of turnover of fixed assets, the security in such companies is less favorable because of questionable possibilities for the timely conversion of assets into cash. The participation of fixed assets in total assets is calculated by the following formula: The rate of fixed assets financing (investing)= fixed assets total assets Indicators of horizontal financial structure Current ratio is calculated as the ratio between current assets (excluding fixed assets for sale) and current : Current ratio = current assets current In doing so, we are interested in whether a company is able to repay maturing short-term obligations with the sale of its short-term assets. The value of the indicator above one reveals that the company finances current assets also in the long-term. The greater the ratio the greater the possibility of the company to settle its current. The value of current ratio would theoretically be approximately two (optimum size of the current ratio in practice depends on the company and on the specifics of the activity), which enables reliable cash flows. However, since the current ratio does not deal with the liquidity of the individual components of liquid assets it can be recognized only as a rough measure of liquidity. Slightly tighter liquidity indicator is the ratio of direct coverage of short-term (quick ratio), which does not include in short-term liquid assets inventories and short-term receivables, which are the least liquid forms in current assets. Quick ratio shows the coverage of short-term by liquid assets, i.e. cash and short-term financial investments: Quick ratio = liquid assets current The higher the value of this coefficient the greater is usually the liquidity of the company. The optimum size of the quick ratio depends on the maturity of short-term. The company must ensure that the value of these indicators should be neither too high as it could invest the most liquid assets more profitably, nor too small, as the company should be further borrow, postpone payments to their suppliers and other creditors and to assume all the consequences of their lack of liquidity. Family business characteristics in Slovenia A p p e n d i x 3

4 Turnover indicators Companies are often financed with open operating ; how many times a year they turn tells us. The coefficient of settling current operating = operating expenses (without depreciation) average current operating The lower the ratio the longer the time during which the company meets its short-term commercial obligations or the time of financing of the company by creditors. Indicators of economic performance The next indicator shows the share of total revenues the company achieved compared with the total expenses. The indicator shows the intensity of the income statement, since the difference between revenue and expenditure represents the profit or loss for the period. The company s business is more effective if the ratio is greater than 1, and if at the same time the company reports profits. The total efficiency ratio = total revenues total expenses Increasing the value of the next indicator shows the increase in labor costs due to overstaffing or a too high average wage per employee compared to operating revenues. The indicator, which is larger in personnel-intensive activities, draws attention to the importance of direct and general salaries and related duties: labor costs The rate of labor costs in operating revenues = labor costs The following indicator of indicates how many profit or loss from operations, the company generated compared with the achieved operating revenues: operating profit Return on sales = operating revenues The ratio between financial expenses from financial and sales: The ratio between financial expenses from financial and sales = financial expenses from financial total sales 4 Family business characteristics in Slovenia A p p e n d i x

5 Profitability indicators The profitability explains what has been achieved with a particular investment, which occurs in the denominator of each indicator. Profit enables the company growth and expansion and the owners return on invested capital. For a company that approaches problems, it is characteristic a below average profitability in a number of consecutive periods, leading to periods of losses and insolvency. The first indicator of profitability shows how effective management has been in the management of funds. It shows how much net profit or net loss the company created in comparison with existing funds, irrespective of how and at what cost these assets are financed. The company operates more effectively if the value of this indicator is higher. Return on assets = net profit average total assets At approaching problems warns the return on equity capital, which is usually substantially less than the return on equity specific to the activity in which the company operates. The calculation of return on equity is therefore the most important for the owners and the most commonly used indicator. By its calculation it is explained how successfully management of the company operates with the equity of owners, because owners require a certain profit on invested equity capital: net profit in the period Return on equity = average equity (excluding net profit for the current accounting period) The company has a better business performance if the value of this indicator is as high as possible and positive. The higher value of the indicator may also mean a higher risk due to a large indebtedness of the company. Return on equity is dependent on the composition of the funding sources of assets. Despite the high value of the indicator, which may be due to the high debt ratio, the operating can be very risky. Higher risk is also associated with a respective rewarding of owners, as reflected in higher expected capital gains. In the case of a high growth of the company, which of course has a favorable effect on the upper indicator, there is a risk of illiquidity of the company. Indicators of the income Total revenues (TR) - represent the sum of operating, financial and other revenues, therefore all revenues generated by the company during its operations. Added value - a fundamental measure of economic activity and success, and means newly created value, which the company produces in the observed period (positive value) or loss on the substance (negative value). Added value = gross operating yield costs of materials, goods and services other operating expenses Family business characteristics in Slovenia A p p e n d i x 5

6 The following indicator shows the average amount of labor costs per employee: Labor costs per employee = labor costs average number of employees The following indicator shows the amount of total revenues, which were created in the company per each employee. The company s business is more successful, if it created a higher amount of total revenues per employee and had net profits. Total revenues per employee = total revenues average number of employees Indicators of the operational cash flow EBITDA (earnings before interest, taxes, depreciation and amortization represents the difference between gross operating yield and expenses from operations plus depreciation and amortization. It indicates the company s ability to cover the amount of depreciation and other expenses not related to operating expenses. EBITDA = operating profit + depreciation and amortization Other financial indicators also exist. 1 Adapted from Juričič, Juričič 2006: Family business characteristics in Slovenia A p p e n d i x

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