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AFA
Block 2.2 - equity and financial analysis
| Question | Answer |
|---|---|
| what are the conditions of economic-financial viability? | 1. necessary and adequate financing for investments 2. able to face committed payments at all times 3. obtain profits in the medium-term, adequate to the capital contribution |
| what are the 5 stages of analysis | 1. political/social/economic environment 2. swot 3. recommendations 4. qualitative analysis 5. economic-financial analysis (solvency, liquidity, profitability) |
| what is the equity situation of a company? | indebtedness/debt capitalisation |
| what is the financial situation of a company? | short-term solvency (liquidity) working capital management company asset turnover |
| what considerations should be taken into account for equity-financial analysis | 1. reliability of accounts 2. applicable accounting regulations 3. financial statements used 4. company characteristics |
| what is the ideal balance sheet structure for: a) industrial companies b) commercial companies | a) high investment in fixed assets & possibility of accessing long-term financing, CA double CL, NE = 40-50% b) fixed assets not important as don't require equipment, insignificant LT financing, NE = 20-40% |
| what is net financial debt? | liabilities - cash - other liquid assets = net financial debt / EBITDA - shows health of company (debt over cash flow) - lower value = greater payment capacity - used by large companies, doesn't matter if shares are listed |
| where is debt listed on the BS, and what is it? | in liabilities of BS, current obligations from past events |
| how can you cancel debt? | cash delivery of other assets renewal/replacement of other liabilities conversion of debt to equity provision of services total/partial forgiveness |
| the higher the debt... | - greater fixed expenses - greater reimbursement needs - greater probability you won't be able to meet commitments - difficult to get new loans/renegotiate existing ones |
| what is the view of debt from creditors, and owners? | creditors = greater risk of losing principal and collecting interest owners = positive effects |
| what are the 2 debt ratios? | 1. Ratio of liabilities to net equity = compare total debt incurred with net equity, measures degree of dependence/financial independence from third parties, < 1, impacts solvency 2. Total debt ratio = divide total liabilities by equity + liabilities |
| what is utilisation? | credit institutions have a series of conditions in loan contracts (financial and non-financial obligations = COVENANTS) - require retention, non-disposal of percentage of loan (eg deposit), limit/eliminate dividend payments, limit investments |
| what does solvency measure? | analysis of financial situation tends to evaluate the capacity to meet acquired commitments when due - firms ability to sustain activity long-term |
| what is liquidity? | company's ability to generate cash to meet short-term commitments - ability to convert asset to cash/obtain cash from other means (credit accounts) - considered financially well balanced when inflows & outflows allow it to meet debt payments over time |
| what are the 3 questions used to determine the reasonableness of indicators? | 1. is debt analysis correct? = total NOT partial, gross financial debt = ONLY financial debt (which is partial) 2. does the concept "net financial debt" make sense? = gross conceptual error from deductions 3. is: net financial debt/EBITDA useful? |
| what are some errors with: net financial debt/ EBITDA? | - result of ratio is contaminated and is of little use - EBITDA indicates a partial profit margin NOT cash flow as some people confuse |
| what is the static cash flow, what does this mean? | profit/result + amortisation - doesn't measure or predict future cash inflows |
| what aspects have to be considered for liquidity | 1. liquid media needs 2. resource generation 3. time sequence of collections & payments 4. QUALITY OF CURRENT ASSETS & COMPOSITION OF LIABILITIES - evaluate quality of liquidity 5. SPEED OF CONVERSION TO LIQUID ASSETS, & enforceability of liabilities |
| what is the liquidity coefficient? | measures the degree to which current assets cover current liabilities - the excess is a 'safety margin' against possible losses in the realisation of current assets other than treasury, or in the event of unforeseen events |
| what does a lack of liquidity suppose for: a) company b) owners c) creditors d) customers | a) not taking advantage of discounts, not paying debts, having to sell assets to pay debts b) decrease profitability, risk of losing investment & can affect equity of partners c) delay in the collection of interest and principal d) supply problems |
| what are rotations? | dynamic indicators of movement of certain accounts to try analyse their speed of circulation - number of times the account is renewed - dynamic magnitude (number of times static magnitude rotates) |
| what if an asset has a great turnover? | greater turnover = greater capacity to become liquid |
| what if a liability has a great turnover? | greater turnover = greater enforceability and lower liquidity of the company |
| what are terms? | number of times converted/ translated into the term which an account remains in business - stocks is most useful & well known |
| what terms do you want for stocks? | 1. low rotation with high margin (implied risks = finance) 2. high rotation/turnover but low margin (implied risk = market) |
| what is an average maturity period? | average maturity period is the time from when stocks are acquired until they are collected for sales made to customers - directly related to static 'working capital' - to monetise it you need to find the necessary average investment or working capital |
| how do you guarantee punctuality in payments | 1. Cash Budget = expected CF for next yr 2. Sales days to finance = calculate cash cycle terms in days at sale price, calculate days of sale to be financed = working capital needs 3. Current management accounts = CA - CL = Operational funding needs |
| what is financial viability? | Working capital -> 0 = positive - safety stock & min necessary cash balance considered as a long-term investment, financed with permanent resources - permanent capital = absolute number of current capital, only has meaning if is related to magnitudes |
| what are some disadvantages of permanent capital | static data supposes that company is in liquidation easy to manipulate |
| what does the measurement of working capital depend on? | 1. the quality of its components 2. the sector and average period of financial maturity of the company |
| what are current capital (CC) needs? | minimum investment in current operating assets minus spontaneous financing or operating credits 1. real CC > min CC = FINANCIAL SURPLUS 2. real CC < min CC = FINANCIAL DEFICIT 3. real CC - min CC = NET CASH |
| how do you fix a financial deficit? | 1. increase real CC = increase permanent financing or sale of fixed assets 2. reduce minimum CC = reduce stock, shorten collection period, increase payment period |
| what are treasury situations? | result of cash position should be equal to 0 - if cash situation > 0 = cash surplus - if cash situation < 0 = financing negotiated/ cash deficit |
| what is a cash surplus? | indicates that the company is underusing some items of current assets - result = reduction of debts |
| if a company has a cash deficit, what may they need to do? | 1. increase treasury to adapt to real needs (increasing NCL/equity OR liquidating underused NCA) 2. reduce cash needs according to working capital (increase stock turnover, decrease customer payment terms, increase supplier payment terms) |
| describe the results of the basic financing ratio? | 1. BFr = 1 - balanced situation, good financial proportion - financial resources & NCA 2. BFr > 1 - financing surplus = ST resources > need NCA 3. BFr < 1 - financing deficit/gap = part of permanent element & LT assets financed by LT financial resources |
Created by:
patriciam03
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