Financial Statement Analysis
Section 8.
Writing a Financial Analysis Report
An example of analysis grid
Guidance Notes
Golden Rules
Limitations of Financial Ratios
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Illiquidity risk: short and longlong-term ratios
Summary Note
Fahmi Ben Abdelkader ©
HEC Paris
2015
10/8/2015 8:39 PM
1
Chapter Outline
Writing a Financial Analysis Report
An example of analysis grid
Guidance Notes
Golden Rules
Limitations of Financial Ratios
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Illiquidity risk: short and long-term ratios
Summary Note
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Financial Statement Analysis
2
Writing a Financial Analysis Report
An example of analysis grid
Guidance Notes
Golden Rules
Limitations of Financial Ratios
How to conduct a financial analysis?
A guiding principle
In the long run, a company can survive only if it creates value for its shareholders and meets
its commitments towards all its stakeholders
To do so, it must:
Financial Analysis
Generate wealth
Growth
Analysis
Invest
Finance its investments
Generate a sufficient return
Anticipate and manage illiquidity risk
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Writing a Financial Analysis Report
Profitability
Analysis
Risk Analysis
An example of analysis grid
Guidance Notes
Golden Rules
Limitations of Financial Ratios
How to conduct a financial analysis?
Preliminary
analysis
(1)
Strategic and
Economic
Assessment
(2)
Growth Analysis
Financial
Analysis
(3)
Profitability
Analysis
(4)
Risk Analysis
Summary
note
(5)
Recommendations
3
Financial Statement Analysis
The toolkit of the financial analyst
1.1 Understand the characteristics of the sector in which the
company operates…
1.2 … analyse the auditors’ report and accounting policies
2.1 Growth measurement
Sales, Net Income, EBITDA, Total Assets
2.2 How the firm uses its money?
Fixed Assets, WC, Capital Employed,
Cash flow from investment activities
2.3 Where does the money come from?
Leverage, Equity, Net Debt, Capital
Invested, Short-term debt, etc.
2.4 Analysis of the Cash Cycle
WC in days’ worth of sales; Cash flow
from operating, FCF
3.1 Margin analysis
Profitability ratios, Cost structure
3.2 Return on Invested Capital (ROIC)
ROIC = NOPAT/ Capital Employed
ROIC = Oper. Margin * Asset turnover
Economic Value Added = ROIC - WACC
3.3 Return on Equity (ROE)
ROE = Net Income/ Equity
ROE = ROIC + Leverage effect
Residual Income= ROE - re
4.1 Short-term liquidity risk
Current ratio
Quick ratio
4.2 Solvency risk
Interest coverage ratio, leverage, etc.
5. Develop and communicate conclusions / recommendations
Fahmi Ben Abdelkader ©
Financial Statement Analysis
Writing a Financial Analysis Report
An example of analysis grid
Guidance Notes
Golden Rules
Limitations of Financial Ratios
Some Guidance Notes
There is no single indicator of good health
A rigorous Financial Analysis requires a combination and a cross-analysis of different indicators covering several
aspects to “good financial health”
Ratios are not very helpful by themselves; they need to be compared to something: an appropriate
benchmark
Time-Trend Analysis
Comparison with competitors and industry peers
Return ratios should be compared to the required rate of return (Opportunity Cost of Capital)
Don’t only focus on the numbers, you need to be aware of the organisation’s business strategy and
objectives
Understand the nature of the industry in which the organisation operates
Understand that the overall state of the economy may also have an impact on the performance of the organisation
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Writing a Financial Analysis Report
Financial Statement Analysis
5
An example of analysis grid
Guidance Notes
Golden Rules
Limitations of Financial Ratios
Some Golden Rules
Spending money does not necessarily make you poorer and neither does receiving money
necessarily make you any richer.
A positive cash flow is not always value creating and vice versa (Cash generated by the core business versus cash
generated by non-operating activities)
Earnings are an opinion, cash is a fact
The need to assess earnings quality
In assessment of earnings quality, the analyst should consider the materiality and variability of NON-OPEARTING
items of income such as non-cash items
A lever can become a club
The impact of financial leverage cannot be analyzed independently of Risk
The value of a business depends primarily on the capacity of its assets to generate cash flows, and less on capital
structure choices
A lack of liquidity may lead to loss of business opportunities and, in a worst case, bankruptcy
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Financial Statement Analysis
6
Writing a Financial Analysis Report
An example of analysis grid
Guidance Notes
Golden Rules
Limitations of Financial Ratios
Limitations of Financial Ratios
« les chiffres sont des êtres fragiles qui, à force d'être torturés,
finissent par avouer tout ce qu'on veut leur faire dire »
Alfred Sauvy
Despite the appealing nature of financial ratios, they should be used with caution:
Based on historical accounting information and, thus, backward-looking
Many ratios provides a snapshot of the firm’s financial position at a given point in time (e.g. Seasonality effects).
Accounting practices differ among firms and countries
Accounting numbers always subject to window dressing (e.g. ROE).
Inflation Effects; mostly on balance sheet and income statement amounts.
10/8/2015 8:39 PM
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Financial Statement Analysis
7
Chapter Outline
Writing a Financial Analysis Report
An example of analysis grid
Guidance Notes
Golden Rules
Limitations of Financial Ratios
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Illiquidity risk: short and long-term ratios
Summary Note
10/8/2015 8:39 PM
Fahmi Ben Abdelkader ©
Financial Statement Analysis
8
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Strategic and Economic Assessment
Understand the Business well and identify the main characteristics of:
⇒ the sector in which the company operates…
⇒ the product
⇒ the production model
⇒ distribution network
⇒ markets (local vs foreign)
Etc.
What are the potential implications of these characteristics on:
⇒ the operating cycle
⇒ the Cash cycle
⇒ the working capital
⇒ Investment requirements
⇒ margin
Etc.
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Carlsberg Case Study
9
Financial Statement Analysis
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Strategic and Economic Assessment
The Carlsberg Group is the fourth largest brewer in the world. The Group employs 41,000 people and is
characterized by a high degree of diversity of brands, markets, and cultures.
The business is focused in Western Europe, Eastern Europe and Asia where the firm has strong market
positions. The rest of the world is mainly serviced through export or license agreements.
An extensive portfolio of more than 500 beer brands provides a beer for every occasion and palate. Their
flagship brand, Carlsberg, is one of the best known beer brands in the world, and Baltika, Carlsberg,
Tuborg and Kronenbourg are among the biggest brands in Europe.
Since growth estimates are expected to be somewhat stagnant in Western Europe (poor performance in
Spain and Greece), Carlsberg has been engaging in a lot of acquisitions to gain market share in
emerging markets, mainly Russia and Asia. However, Carlsberg has suffered from the 200% duty
increase on beer in Russia in 2010.
A benchmark: Heineken
Both companies focus on the production and sale of beverages and they are among the top-five players in
the brewery sector worldwide. From this perspective, they are comparable.
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Financial Statement Analysis
10
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Strategic and Economic Assessment
Stock price trends (2010-2013)
Heineken
Carlsberg
Dow Jones
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Carlsberg Case Study
Financial Statement Analysis
11
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Strategic and Economic Assessment
Beer is the core product
Industrial business activity
the working capital is expected to be positive
Pressure on the cash cycle
Heavy investments in Asia and Russia over the past 6 years
High Investment requirements
Assess asset turnover
Relatively strong market position
Declining sales in Western European countries, mainly those affected by the debt crisis
The 200% duty increase on beer in Russia in 2010
margins are expected to be relatively comfortable
But high pressure on margins due to the debt crisis and an increase in taxes in Russia
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Financial Statement Analysis
12
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Wealth creation at a glance
AAGR Year 12 Year 11 Year 10
9,1%
5,7%
5,8%
1,1%
24,4%
4,2%
2,4%
7,2%
13,0%
4,2% -4,7% 12,1%
20,2%
9,7% -4,5% 43,0%
Growth rate
Net Sales
Total Assets
EBITDA
Net Income
Year 9 Year 8 Year 7
-0,9% 34,0% 8,9%
-6,1% 134,1% 4,7%
25,1% 29,3% 12,1%
30,0% 23,5% 19,6%
Positive growth rate for both sales and total assets, with an exceptional increase in 2008
=> Explain the substantial increase in total assets in 2008: Fixed Assets (investment policy) ? Or
current assets (deterioration of WC)? Or Cash ?
Total assets have grown faster than Net Sales
=> Need to assess Carlsberg’s effectiveness in using its assets: Asset turnover
EBITDA : after a significant increase in 2008 and 2009, the pace of growth clearly declined
=> Need to understand this downward trend (operating performance, competition context, etc.)
Both EBITDA and Net Income increased faster than Net Sales, which may reflect good cost
management
=> Examine cost structure
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Carlsberg Case Study
13
Financial Statement Analysis
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
How the firm uses its money?
Fixed Assets / Total Assets
Year 12
86,3%
Year 11
87,3%
Year 10
88,9%
Year 9
88,7%
Year 8
86,5%
Year 7
75,6%
Inventory / Total Assets
Accounts Receivable / Total Assets
Cash & Equivalent / Total Assets
Fixed Assets
Operating Working Capital
Capital Employed
2,9%
5,1%
3,7%
17 799
-1 183
16 616
2,9%
5,3%
2,1%
17 276
-1 213
16 064
2,9%
3,9%
1,9%
17 191
-1 352
15 838
2,7%
4,4%
2,0%
15 984
-1 234
14 750
3,7%
4,4%
2,0%
16 619
-571
16 049
6,2%
10,4%
3,7%
6 201
-92
6 110
Asset structure: the weight of fixed assets significantly increased in 2008. Since that date, asset
structure is quite stable
Fixed Assets almost tripled in 2008 but remained stable over the past 4 years
=> Substantial investments in 2008 (check investments from 2009 to 2012?)
=> Profitability of these investments ?
Working Capital is negative over the period, which is likely to free up cash for the firm
=> Need to explain this downward trend: receivables? Payables? Sales? Cash Cycle?
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Financial Statement Analysis
14
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Where does the money come from?
Year 12
68,4%
40,6%
65,7%
4,2%
30,1%
9 869
6 747
16 616
Financial Leverage
Debt-to-capital ratio
Long-term debt / Total Liabilities
Short-term debt / Total Liabilities
Accounts payable / Total Liabilities
Shareholders' Equity
Net Financial Debt
Invested Capital
Year 11
67,4%
40,2%
65,1%
2,5%
32,4%
9 598
6 465
16 064
Year 10
69,8%
41,1%
63,5%
5,3%
31,2%
9 330
6 508
15 838
Year 9
85,0%
46,0%
66,7%
4,4%
28,9%
7 972
6 779
14 750
Year 8 Year 7
99,6% 128,6%
49,9%
56,3%
69,1%
58,3%
6,3%
9,4%
24,6%
32,3%
8 141
2 672
8 109
3 437
16 249
6 110
Financial Leverage sharply decreased from 128% in 2007 to 68% in 2012
=> This decrease is mainly the result of a constant rise in Equity, and less a debt pay-down policy
Investments in 2008 were funded both by Debt and Equity, which significantly increased capital invested
in the firm
=> Despite a net decline in debt in 2009, the level of net debt remained stable over the past 4 years
=> Need to investigate the cost of debt and its impact on net income
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Carlsberg Case Study
15
Financial Statement Analysis
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Analysis of the Cash Cycle
Working Capital Needs in days’ worth of sales
Year 12
Year 11
Year 10
Year 9
Year 8
Year 7
Inventory days
25
25
25
22
32
31
+ Receivable days
59
61
49
48
60
48
- Payable Days
131
134
126
118
112
72
= Operating Working Capital days worth of sales
-48
-48
-52
-47
-20
7
Working Capital Days moved from positive to negative in 2008, and registered a notable decrease over
the period
=> Successful policy of rationalization of required working capital
=> However, we should notice the substantial increase in payable days.
=> Need to dig deeper to understand how Carlsberg can afford to wait more than 4 months before
paying suppliers
=> Are these credit terms negotiated or are they the result of an out of control situation?
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Financial Statement Analysis
16
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Analysis of the Cash Cycle
Operating Working Capital
Year 12
-1 183
Year 11
-1 213
Year 10
-1 352
Year 9
-1 234
Year 8
-571
Year 7
-92
Year 12
Year 11
Year 10
Year 9
Year 8
Year 7
Cash From Operating Activities (I)
1 323
1 181
1 477
1 827
1 047
648
Cash From Investing Activities (II)
-533
-654
-783
-413
-7 659
-660
790
527
694
1 414
-6 612
-12
Free Cash Flow (I+II)
Except 2007 and 2008, FCF is positive
=> Carlsberg generated enough cash from operations to cover investment needs
=> Negative FCF in 2008 is mainly due to heavy investments
Working Capital rationalization was extremely profitable by improving the cash flows of Carlsberg
=> Substantial cash savings
=> Positive cash from operations
=> Thanks to Working Capital rationalization from 2009 to 2012, investments were entirely covered by
cash from operations: money generated thanks to the core business activities
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Carlsberg Case Study
17
Financial Statement Analysis
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Margin analysis (Common-size analysis - income statement)
Profit & expenses % of Net Revenue
Net Revenue
Cost of sales
Gross Margin
Operating expenses
EBITDA Margin or Operating Margin
Depreciation & amortization
EBIT Margin
Net financial expenses
Pretax Income
- Corporate income tax
Net Profit Margin
NOPAT (Net Operating Profit After Tax)
Year 12
100%
50%
50%
29%
21%
6%
15%
3%
12%
3%
9%
Year 11
100%
50%
50%
29%
21%
6%
15%
3%
12%
3%
9%
Year 10
100%
48%
52%
28%
23%
7%
17%
4%
13%
3%
10%
Year 9
100%
51%
49%
28%
21%
6%
15%
5%
10%
3%
7%
Year 8
100%
52%
48%
31%
17%
6%
11%
6%
5%
-1%
5%
Year 7
100%
50%
50%
33%
17%
6%
11%
3%
8%
2%
6%
11%
11%
13%
11%
12%
8%
The weight of cost of sales and operating expenses is relatively stable over the period
=> Net sales and cost of sales have increased at the same pace: a good cost management
Operating margin registered an interesting increase after 2008
=> Thanks to a better control of operating expenses
=> Investments made in 2008 seem to be profitable
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Financial Statement Analysis
18
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Margin analysis (Common-size analysis - income statement)
Profit & expenses % of Net Revenue
Net Revenue
Cost of sales
Gross Margin
Operating expenses
EBITDA Margin or Operating Margin
Depreciation & amortization
EBIT Margin
Net financial expenses
Pretax Income
- Corporate income tax
Net Profit Margin
Year 12
100%
50%
50%
29%
21%
6%
15%
3%
12%
3%
9%
Year 11
100%
50%
50%
29%
21%
6%
15%
3%
12%
3%
9%
Year 10
100%
48%
52%
28%
23%
7%
17%
4%
13%
3%
10%
Year 9
100%
51%
49%
28%
21%
6%
15%
5%
10%
3%
7%
Year 8
100%
52%
48%
31%
17%
6%
11%
6%
5%
-1%
5%
Year 7
100%
50%
50%
33%
17%
6%
11%
3%
8%
2%
6%
11%
11%
13%
11%
12%
8%
NOPAT (Net Operating Profit After Tax)
Net Income doubled from 2008 to 2010
=> The improvement of the operating margin
=> The continuous reduction in the proportion of net financial expenses
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Carlsberg Case Study
19
Financial Statement Analysis
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Return analysis
ROIC (Return On Invested Capital)
Year 12
Year 11
Year 10
Year 9
Year 8
Year 7
NOPAT (Net Operating Profit After Tax)
11%
11%
13%
11%
12%
8%
* Turnover rate of Capital employed
54%
53%
51%
54%
50%
98%
= ROIC (Return On Invested Capital)
6,1%
6,0%
6,4%
5,8%
5,9%
7,6%
ROIC was quite stable over the period (around 6%)
=> The increase in NOPAT in 2008 was not sufficient to offset the sharp decline in asset turnover
=> Despite a slight improvement in asset turnover during the three past years, its level remains
significantly lower than the highest level reached in 2007
=> The huge amount of investments in 2008 has weighed heavily on the operating performance
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Financial Statement Analysis
20
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Analyzing ROIC: Economic Value Added
Return on invested capital for Carlsberg Versus WACC
8,0%
WACC=7%
7,0%
6,0%
5,0%
4,0%
3,0%
2,0%
1,0%
0,0%
2005
2006
2007
2008
2009
2010
2011
2012
Carlsberg is only creating value for its shareholders and lenders in 2007
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Carlsberg Case Study
21
Financial Statement Analysis
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Analyzing ROIC: Economic Value Added
Return on invested capital for Carlsberg and Heineken
20,0%
ROIC Carlsberg
18,0%
ROIC Heineken
16,0%
14,0%
12,0%
10,0%
8,0%
6,0%
4,0%
2,0%
0,0%
2005
2006
2007
2008
2009
2010
2011
2012
Carlsberg is only able to generate a ROIC that exceeds Heineken’s in 2008
Carlsberg’s level of profitability is generally below Heineken’s in the period examined
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Financial Statement Analysis
22
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Analyzing ROIC : Where Does Profitability Come From?
Comparison of profit margin
of Heineken and Carlsberg
Comparison of turnover rate for
Heineken and Carlsberg
18,0%
140%
NOPAT Carlsberg
16,0%
Asset Turnover
Carlsberg
Asset Turnover
Heineken
120%
NOPAT Heineken
14,0%
100%
12,0%
10,0%
80%
8,0%
60%
6,0%
40%
4,0%
20%
2,0%
0,0%
2007
2008
10/8/2015 8:39 PM
2009
2010
Fahmi Ben Abdelkader ©
Carlsberg Case Study
2011
2012
0%
2007
2008
2009
2010
2011
2012
23
Financial Statement Analysis
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Return analysis
Return On Equity
ROE (Return On Equity)
Year 12
Year 11
Year 10
Year 9
Year 8
Year 7
8,5%
7,9%
8,6%
7,0%
5,3%
13,0%
The Financial Leverage Effect
Year 12
Year 11
Year 10
Year 9
Year 8
Year 7
ROIC (Return On Invested Capital)
6,1%
6,0%
6,4%
5,8%
5,9%
7,6%
Net cost of debt
2,7%
3,2%
3,4%
4,3%
6,4%
3,3%
ROIC - Net cost of debt
* Financial Leverage
= The Financial Leverage Effect
3,4%
2,9%
3,1%
1,5%
-0,5%
4,2%
68,4%
67,4%
69,8%
85,0%
99,6%
128,6%
2,3%
1,9%
2,1%
1,2%
-0,5%
5,4%
Carlsberg’s ROE was clearly affected by the financial leverage in 2008
=> The firm is not able to recover to 2007’s ROE; its highest level
=> The continuous reduction of the debt burden and the financial leverage has led to an improvement of
the financial leverage effect
=> The lower performance in terms of ROE is mainly due to the relatively low ROIC
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Financial Statement Analysis
24
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Analyzing ROE: Residual Income = Value added for owners = Owners’ Economic Profit
Return On Equity for Carlsberg Versus Required Return on Equity (Equity Cost of Capital)
14,0%
12,0%
re=10%
10,0%
Carlsberg’s ROE
8,0%
6,0%
4,0%
2,0%
0,0%
2005
2006
2007
2008
2009
2010
2011
2012
Carlsberg is only creating value for its shareholders in 2006 and 2007
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Carlsberg Case Study
25
Financial Statement Analysis
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Analyzing ROE: Cross-Sectional Analysis
Return On Equity for Carlsberg and Heineken
30,0%
ROE Carlsberg
25,0%
ROE Heineken
20,0%
15,0%
10,0%
5,0%
0,0%
2005
2006
2007
2008
2009
2010
2011
2012
Carlsberg’s level of ROE was generally below Heineken’s in the period examined
A decomposition of ROE shows that the higher return in Heineken can be attributed to a
higher ROIC.
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Financial Statement Analysis
26
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Illiquidity risk: short and long-term ratios
Short-term liquidity ratios
Year 12
Year 11
Year 10
Year 9
Year 8
Year 7
Current ratio
Quick ratio
Cash ratio
77%
60%
21%
71%
54%
54%
59%
43%
43%
61%
46%
46%
74%
54%
54%
87%
65%
65%
Cash flow from operations to short-term
debt ratio
36%
33%
40%
55%
30%
28%
Short term liquidity ratios show that the firm’s current assets are not able to cover current liabilities
=> The sharp decline in cash ratio could be cause of concern. Need to investigate the reasons of this
brutal drop
=> CFO to short-term debt ratio registered also a significant decrease compared to its level in 2009
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Carlsberg Case Study
27
Financial Statement Analysis
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Illiquidity risk: short and long-term ratios
Long-term liquidity risk
Long-term debt / Total Liabilities
Short-term debt / Total Liabilities
Financial Leverage
Solvency ratio
Interest Coverage ratio
Interest Coverage ratio (Cash)
Debt to EBITDA
Debt to Cash flow from operations ratio
Year 12
65,7%
4,2%
68,4%
47,8%
5,57
5,57
3,62
5,10
Year 11
65,1%
2,5%
67,4%
48,5%
4,73
4,37
3,62
5,47
Year 10
63,5%
5,3%
69,8%
48,3%
4,64
5,11
3,47
4,41
Year 9
66,7%
4,4%
85,0%
44,2%
2,91
4,56
4,06
3,71
Year 8
69,1%
6,3%
99,6%
42,0%
1,83
2,26
6,07
7,75
Year 7
58,3%
9,4%
128,6%
32,6%
4,03
4,03
3,33
5,30
Financial Leverage sharply decreased from 128% in 2007 to 68% in 2012
=> This decrease is mainly the result of a constant rise in Equity, and less a debt pay-down policy
Interest Coverage ratios registered a substantial improvement over the period
=> This decrease is mainly the result of a constant decrease in net financial expenses
Debt to EBITDA ratio has also registered a positive evolution
=> however, we should notice the stagnation of this ratio over the past 2 years, the debt stopped
decreasing !
10/8/2015 8:39 PM
Fahmi Ben Abdelkader ©
Financial Statement Analysis
28
Carlsberg Case Study
Preliminary Analysis
Growth Analysis
Profitability Analysis
Liquidity risk: short and long-term ratios
Summary Note
Summary Notes: the strengths and weaknesses
The strengths
Net sales are growing faster than costs: good management of operating costs leading to a positive
evolution of operating margin
Successful policy of rationalization of required working capital: substantial cash savings
Thanks to Working Capital rationalization over the past 4 years, investments have been entirely
covered by cash from operations: money generated thanks to the core business activities
The weaknesses
Net Assets are growing faster than net sales: heavy investments have considerably affected asset
turnover
ROIC is not high enough to compensate for lower asset turnover
Operating performance is not sufficient to create value for shareholders
Recommendations
Need to assess the quality of investments (i.e. assets)
The significant increase in payables could be cause of concern: perhaps indicating the firm is becoming
a bad payer ?!
10/8/2015 8:39 PM
Fahmi Ben Abdelkader ©
Financial Statement Analysis
29