FINANCIAL PERFORMANCES
20/09
Financial reporting reports information for the all companies. Management accounting system
has the same accounting numbers , but booked down for part of the company , according for the
needs of managers. External regulation is regulated by law , management accounting system is
not regulated by law. Management accounting system for the information needs of the managers
, so each manager can organize the information as he wants, according to his needs.
The performance of company is a large concept, company is profitable and sustainable in time.
Shareholders view : The firm must create value for shareholders , under the constrait of giving
satisfaction to other stakeholders.
Stakeholders view : You have stakeholders and shareholders on the same plain.
Performance is multidimensional : Ambiental , social , governance …. We should speak about
different aspect
We can put together all in an Integreted reported ,( report that integrate all the side of
performance).
Sustainable profit higher than the cost of capital.
Financial performance :
-Profitability : Generating profit satisfactory for the investors , so it means when it is higher than
the cost of capital. The cost of capital depends on how much is the capital invested , so for
instance the equity. So the story is the fair reward . Ke is the percentage desiderated as a reward
by the shareholder .
The cost of capital : is the alternative reward of other alternative project
R-C > ke E. >>>> Value creation
To create value for shareholders , the company has a pre-condition. Financial solvency means
something else , the ability to rapair that , the ability to cover the obligation.
SOLVENCY : In a given period you have to match the obligation you pay ; it s a survival condition.
A company must be solvent in both the short run and medium/ long term.
Are charateristichs wich helps understand a company can be solvent in the financial statement :
cash out flows and cash in flows
At the beginning future cash in flows and future cash out flows depends on past business.
Financial statement are useful , but you have to analyze the past to understand the future. Who
makes this analysis? The first step is the reformulation of financial statements , expressing them in
the form which is more useful for the analysis to be performed and for this reason does not exist
only one form.
Financial statements : income statements , balance sheet, cash flows statements.
Profitability and solvency in the short run can be desalinated . You can have company with no
problem but doesn’t generate value for investors. For example firms in the first year of activity.
Also you can have a very profitable company with solvent problem , for instance when profit is not
liquid .
Profitability and cash generation can be completely different. In the long run they tend to
converge on the profitability side .
21/09
Value creation: difference in the value of the company. Manager contribute to increase the value
of the company. DELTA V = Vt1-Vt0 + d -deltaE If the company distributes dividends the value is
something less. If the value is higher just because there was some capital contribute.
The value of a company depends most on future expected cash flows . The financial plan of the
company are not published, the analyst which support the decision of investor make some
conclusion so investors make their own projection.
Balance sheet for solvency analysis reformulate on time of liabilities generate future cash in and
cash out. Current and not current model. I have to depends on the time asset generate future cash
incomes >>> not current asset ( not generate cash in flows in the medium/long term) current
assets ( generate In the medium/long term) , liabilities current ( expected to be paid in the short
run) , not current ( expected to be paid in the medium/long term), equity.
The reformulation of the balance sheet is already reformulated according to this current and not
current , which is useful for the solvency anylisis.
PROFITABILITY
P = INCOME/ CAPITAL
Is all about an analysis of capital ( balance sheet, you can see where do you invest capital and how
much income came from this investment , and how much the sources cost) and income , which I
have information on income statement.
Business/ Operation cycle ( average duration between you buy from suppliers and sell to
customers , generally speaking 4 months-1 year) Some exceptions can be real estate
constructions , ship constructions.
For asset not generating from operation we assume general convention of 12 months.
NOT CURRENT ASSETS : i.e. Building machinery, in general all fixed assets( is normal exceed
operation cycle duration). Can be tangible , intangible and financial .
CURRENT ASSETS : Prepared cost ( cost that are current in nature but are future benefits )
Prepared revenues ( Risconti attivi) , credits ( accounts), liquidity.
The convention time to assets refers what is generated from operation business activities (?).
EQUITY :
NOT CURRENT LIABILITIES : Long term financial debts , short term financial debts ( overdrafts
facilities).
CURRENT LIABILITIES : commercial debts ( mostly are current liabilities ; they are al debts coming
from the fair payment condition of purchase) Provisions ( can be even not current) . Unearned
revenues
Provisions due to the uncertainty can be classified both current and not current
Unearned revenues : revenues that you got from some performances but you didn’t rend service
or product. Basically they are current .
Accounting standard >> contibutions from the state are accounted in a form of revenues or
reduction fixed assets.
28/09
ASSETS :
-
Specific income capacity  Generate revenues Alone : financial assets, surplus assets (
could be used in operating cycle )
-
Overall income capacity  Generate revenues only if combined in a business system :used
in operating business cycles
LIABILITIES:
-
How do they cost?
Specific explicit cost : cost present in the income statement. Financial debts ( including
bonds ).
Indetermined cost : it’s an aleatory cost , it’s basically cost of equity . I reward giving them
the income.
Implicit : Commercial cost , is not explicit it is embedded in the purchase cost
Where we put unearned revenues in this categories? They fit perfectly with the category of
implicit cost.
Commercial debts and unearned revenues are generated by operating cycles.
Equity and financial debts are generated by financial transation.
Surplus assets are all the assets that culd be used in the operating business
The drivers of probitability can come : from operating cycle or surplus assets or financial choices (
how much financial investiment I do ). We need to analyze also the effects of non recurring
transactions.
How much capital the company invest in the operating business cycle ? All the operating assets
We consider operating liabilities as reduction operating assets , to determine as the difference the
capital invested  net invested capital.
If you have 3 milion in liquidity and 3 milion in debts for the fincial analyst is like the company
could . If you have financial debts and huge amount of liquidity it means you can easily cover the
debts ( it seems like you are less in debts) so liquidity e s.t. fin. Minus fin.debts  net financial
position.
Short term fincial asssets are financial assets easily convertible in liquidity
We refer at net operating invested capital
NOIC = NET OP. FIXED ASSETS + NET OP. WORKING CAPITAL
NOWC= INVENTORY + COMMERCIAL RECIVEBLES-COMMERCIAL DEBTS-UNEARNED REVENUES
EXTRA OPERATING ASSETS
Financial fixed assets in this reformulation are considerated more or less as surplus assets.
28/09
I have to connect NIC to revenues and cost coming from operating cycle.
Op. revenues (basically are sales) – operating cost
OP. REVENUES – OP. COST = OP.INCOME ( EBIT)
+- INCOME FROM EXTRA OP.INVESTEMENT = TOTAL INCOME FROM INVESTMENTS
-NET FINANCIAL EXPENSENS= EBT
-INCOME TAXES=NET EARNI
INCOME FROM EXTRA OPERATING INVESTEMENTS : cost and revenues coming from extra
operating assets ( they generally produce most revenues , but for building for istance I could have
some maintance cost) . Consistency is more important than detailed analis : if I have no idea you
can make an estimate or if don’t know anything.
Basically you can not split in the balance sheet and than put together in the income statement 
you need to be consistent!
NET FINANCIAL EXPENSENS. All revenues and costs coming from assets and liabilities of net fincial
position(?)
Financial debts can generate revenues f.i. when I negotiate to not pay part of the debt or when I
convert a debt in another valuta and I have a gain coming from this
*GRAFICO*
OP.REVENUES – MONETARY OP. COST( All cost that will be paid soon or later in the future : raw
materials , services , personal , other costs . It dos not include the depretation. And amortization.
Why is useful EBITDA ? Is not a profit , is a partial margin before some cost . It’s considerated as a
proxy of operating capacity , a proxy of operating cash flows minus the financial resources
generated by operating cycle.
Two company can be similar from EBIT analysis , but if they use some depreciation policy you can
consider EBITDA and you can look at it.
NON RECURRING ITEMS : means that if I have this income statement , basically any area of this can
be influenced by items that non happens normally , non recurring transaction that surely wiil not
be repeated in the future , are not transaction that company do normally. If you for instance
selling of fixed assets. Evirthing that is surely a transaction that company normally do or can do .
An analyst when sees
According to IFRS you can’t separate non recurring items separatly.
According both to IFRS and Italian ones you can ..
What the analyst do is to separate non recurring items from this presentation and booking them in
the end
Income taxes that are not recurring : For instance some taxes benefits ( for example because I
have done some investment) that the state grant for an year but not every years.
*Grafico*
Now you have to present not recurring items to the ones referred , because estimationed can be
biasied.
CASH FLOW STATEMENT
What is the cash flow statement ? Is a flow document , Basically it says the cash in
flows and cash out flows that happened in a period.
It explains the causes of increase and the cause of decrases in the cash , not how
much it is.
For which causes of transacton? It increase for revenues and decrease for costs. But
also for instance you can have cash out flows for capital expenditure , transaction
completely different they go in income statement as deprezation.
CF out : Costs , insvstments, Fin. Debts repayment , equity repayment + dividends
CFIn : Revenues , disposals , Fi. Debts borrowings, equity contributions
30/09
You can build cash flow statement starting from the balance sheet and income
statement.
The construction of the cash flow statement is based on this simple logic :
- You can have assets that can increase or decrease or liabilites than can
increase or decrease. This means that there can be possible use of cash or a
possible source of cash respectively. For instance if there is an increasity of
invectiory you can have a possible cash out. The same if liabilities decrease
there is a possible use of cash for repair them , to estenguish the obligation.
Putting in two separate items the net profit of the period , in the balance
sheet is in the equity.
I pass from the rough changes to financial changes trough small adjustments.
Liq (-) : possible use of cashes . I cannot say if it is a real use of cash
Liq(+) : possible use of sources . Depreciation found is a possible use of sources
THEN WE have to classify all the changes in Financial flows.
If there was a change in sherolding interest always investments.
Increase by commercial debts in income(+)
Increase in Fund for provision you recall it income(+)
It balances beacues it’s a change of statement of balance sheet.