Financial Statement Analysis Chapter 2 PDF

Chapter 2 Balance sheet: Asset  2 Objective of the chapter Overview  What is an asset and how can you classify it on the balance sheet?  What different assets can you find on the balance sheet?  How can you analyze differen...

Chapter 2 Balance sheet: Asset  2 Objective of the chapter Overview  What is an asset and how can you classify it on the balance sheet?  What different assets can you find on the balance sheet?  How can you analyze different assets and their importance? What does it mean about the firm? Prof. Alexander Liss Financial statement analysis 52  2 Overview of balance sheet Balance sheet basics  The balance sheet has three sections:  Assets  Liabilities  Shareholders’ equity Asset = liabilities + shareholder’s equity  The balance sheet reports the assets, liabilities, and equity at a point in time.  Balance sheet accounts are permanent accounts because their balance carries over from period to period. Prof. Alexander Liss Financial statement analysis 53  2 Definition Definition of an asset  An asset confers expected future economic benefits  An asset must meet the following two conditions to be reported on the balance sheet: 1. It must be owned or controlled by the company 2. It must arise from a past transaction or event  Assets are distinguished between current and non-current assets Prof. Alexander Liss Financial statement analysis 54  2 Asset side of Adidas SE Source: Adidas SE, 2023, p.189. Prof. Alexander Liss Financial statement analysis 55  2 Asset side of Colruyt Group Source: Colruyt Group, 2023, p.209. Prof. Alexander Liss Financial statement analysis 56  2 Current assets Different current assets  Cash – currency and bank deposits  Cash equivalents – investments with an original maturity of 90 days or fewer  Short-term investments – marketable securities the company expects to sell within the year  Accounts receivable, net – amounts due from customers arising from the sales on credit NET: After uncollectible accounts have been subtracted  Inventories – goods purchased or produced for sale to customers  Prepaid expenses – costs paid in advance for rent, insurance, advertising, and other services Prof. Alexander Liss Financial statement analysis 57  2 Analyzing cash and cash equivalents Cash and cash equivalents  “Cash and Cash equivalents” can be liquidated in an instant  Crucial issue is to determine how much cash is necessary for operating the business (operating cash)  Cash above operating cash is called excess cash  Rule of thumb for determining operating cash is about one percent of total sales Prof. Alexander Liss Financial statement analysis 58  2 Analyzing cash and cash equivalents Cash and cash equivalents of BMW Group (2022) Operating cash: 142618 (mio. Euro) * 1 percent= 1426 mio. Euro Excess cash: 16870 - 1426= 15183 mio. Euro Source: BMW Group annual report, 2022, p.153-155. Prof. Alexander Liss Financial statement analysis 59  2 Analyzing inventory Inventory  goods purchased or produced for sale to customers  Ending inventory (or closing stock) arrives at the balance sheet: Quantity x Value  Example of inventories for Colruyt Group (2023): Source: Colruyt Group annual report, 2023, p.261. Prof. Alexander Liss Financial statement analysis 60  2 Analyzing inventory Accounting for inventories  Three approaches:  First in first out (FIFO)  Last in first out (LIFO)  Weighted average (WA)  FIFO and LIFO look at the flow of inventory and make simple assumptions about inventory sold and inventory at hand  FIFO assumes first goods in are first goods sold  LIFO assumes last goods in are first goods sold (not permitted in IFRS)  Have different impact on both balance sheet and income statement Prof. Alexander Liss Financial statement analysis 61  2 Analyzing inventory Inventory: Analysis impact  FIFO charges old units to Costs of Goods sold  more accurate balance sheet  LIFO charges new units to Costs of Goods sold  more accurate income statement  Assuming rising prices and constant (or growing) inventory: FIFO LIFO Net income Higher Lower Inventory balance Higher Lower Prof. Alexander Liss Financial statement analysis 62  2 Analyzing inventory Inventory turnover and days inventory outstanding  Inventory turnover measures the number of times during the period that the company sells its inventory 𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑𝑡 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = (𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦𝑡 + 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦𝑡−1 )/2  Days inventory outstanding (DIO) measures the number of days required to sell the average inventory available for sale 365 𝐷𝑎𝑦𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 Prof. Alexander Liss Financial statement analysis 63  2 Analyzing inventory Interpreting days inventory outstanding (DIO)  Analyzing DIO is important for at least two reasons: 1. Inventory quality  Product mix can include more (or less) higher margin inventories that sell more slowly  A company can change its promotion policies  A company can realize improvements in manufacturing efficiency and lower investments in direct materials and work-in-process inventories 2. Asset utilization – companies can optimize inventory with:  Improved manufacturing processes can eliminate bottlenecks and the consequent buildup of work-in-process inventories  Just-in-time (JIT) deliveries of raw materials to the production line can reduce the level of raw materials and associated holding costs  Demand-pull production, where raw materials are released into the production process when final goods are demanded by customers instead of producing for estimated demand Prof. Alexander Liss Financial statement analysis 64  2 Analyzing inventory Cash impacts of DIO  All else equal, a lower DIO is preferable.  As inventory is sold more quickly, DIO drops, and the company realizes more cash flow.  Calculation of the effect on cash flow 𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑𝑡 ∆𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 = ∆𝐷𝐼𝑂 𝑥 365  Interpretation: By holding inventory for XX fewer days, the company realized a cash inflow of XX million. Prof. Alexander Liss Financial statement analysis 65  2 Analyzing inventory Colruyt Group’s income statement and inventory footnote (2023) Source: Colruyt Group annual report, 2023, p.261. Prof. Alexander Liss Financial statement analysis 66  2 Analyzing inventory Analyzing Colruyt’s inventory 𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 7074  𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = (𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 +𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡 )/2 = (826+816)/2 = 8.62 𝑡 𝑡−1 365 365  𝐷𝑎𝑦𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 8.62 = 42.36 𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑𝑡 7074  ∆𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 = ∆𝐷𝐼𝑂 𝑥 365 = 42.36 − 38.86 𝑥 365 = 67.78 mio Euro Prof. Alexander Liss Financial statement analysis 67  2 Analyzing accounts receivables Accounts receivables  Amounts due from customers arising from the sales on credit  Accounts receivable are reported on the balance sheet net of the allowance for doubtful (uncollectible) accounts: Source: Hugo Boss AG annual report, 2015, p.222. Prof. Alexander Liss Financial statement analysis 68  2 Analyzing accounts receivables Accounts receivables Firms use aging analysis to estimate uncollectible accounts: Source: Hugo Boss AG annual report, 2015, p.222. Prof. Alexander Liss Financial statement analysis 69  2 Analyzing accounts receivables Analysis of accounts receivables– Magnitude  The magnitude of accounts receivable position is measured with the following two ratios: 1. Accounts receivable turnover / Inverse of the accounts receivable turnover 𝑆𝑎𝑙𝑒𝑠𝑡 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = (𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑡 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑡−1 )/2 1 (𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑡 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑡−1 )/2 = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑆𝑎𝑙𝑒𝑠𝑡 2. Days sales outstanding (DSO) 365 𝐷𝑎𝑦𝑠 𝑠𝑎𝑙𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 Prof. Alexander Liss Financial statement analysis 70  2 Analyzing accounts receivables Interpretation of accounts receivables ratios  When accounts receivable have grown more quickly than sales, we observe:  Lower accounts receivable turnover ratio  Higher percentage of accounts receivable to sales  Lengthening of the days sales outstanding (DSO)  Generally, such a trend is not favorable for two possible reasons  The company is becoming more lenient in granting credit to its customers  Credit quality is deteriorating Prof. Alexander Liss Financial statement analysis 71  2 Non-current assets Different non-current assets  Property, plant, and equipment (PPE), net – land, buildings, and equipment NET: After accumulated depreciation has been subtracted  Long-term investments – investments the company does not intend to sell within the year  Intangible assets– assets without physical substance such patents, trademarks, franchise rights, and goodwill  Goodwill – residual of purchase price when company was engaged in a M&A Prof. Alexander Liss Financial statement analysis 72  2 Property, Plant, and Equipment (PPE) Carrefour’s PPE footnote Source: Carrefour SA annual report, 2023, p 45-46. Prof. Alexander Liss Financial statement analysis 73  2 Analyzing PPE PPE turnover rate  A crucial issue in analyzing PPE is determining productivity (utilization).  What level of PPE is needed to generate a dollar of revenue?  How capital intensive is the company and its competitors?  To address these questions, PPE turnover, defined as follows: 𝑆𝑎𝑙𝑒𝑠𝑡 𝑃𝑃𝐸 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = (𝑃𝑃𝐸𝑡 + 𝑃𝑃𝐸𝑡−1 )/2  More intuitive interpretation using the inverse: 1 (𝑃𝑃𝐸𝑡 + 𝑃𝑃𝐸𝑡−1 )/2 = 𝑃𝑃𝐸 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑆𝑎𝑙𝑒𝑠𝑡 Prof. Alexander Liss Financial statement analysis 74  2 Analyzing PPE Analysis of PPE turnover rate  Higher PPE turnover is preferable because it implies a lower capital investment for a given level of sales.  Higher turnover increases profitability because:  The company avoids asset carrying costs.  The freed-up assets can generate operating cash flow.  PPE turnover is lower for capital-intensive firms and higher for companies in IT. Prof. Alexander Liss Financial statement analysis 75  2 Analyzing PPE PPE useful life  If we assume straight-line depreciation and zero salvage value, we can estimate the average useful life for depreciable assets as follows: (𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡 + 𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡−1 )/2 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑡  Depreciable asset cost excludes:  Land  Construction-in-progress Prof. Alexander Liss Financial statement analysis 76  2 Analyzing PPE PPE percent used up  Percent used up measures the proportion of a company’s depreciable assets that have already been “used up” i.e, that is transferred to the income statement.  This ratio reflects the percent of depreciable assets that are no longer productive and is computed as follows: 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑡 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑢𝑠𝑒𝑑 𝑢𝑝 = (𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡 + 𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡−1 )/2 Prof. Alexander Liss Financial statement analysis 77  2 Analyzing PPE Analysis of percent used up  Knowing the degree to which a company’s assets are used up is of interest in forecasting future cash flows.  If, for example, depreciable assets are 80% used up, we might anticipate the company will need a higher level of capital expenditures to replace aging assets in the near future.  We also expect that older assets are less efficient and will incur higher maintenance costs. Prof. Alexander Liss Financial statement analysis 78  2 Property, Plant, and Equipment (PPE) Carrefour’s PPE footnote Source: Carrefour SA annual report, 2023, p 45-46. Prof. Alexander Liss Financial statement analysis 79  2 Property, Plant, and Equipment (PPE) Carrefour’s PPE footnote Source: Carrefour SA annual report, 2023, p 45-46. Prof. Alexander Liss Financial statement analysis 80  2 Analyzing PPE Analysis of PPE for Carrefour SA-2023 𝑆𝑎𝑙𝑒𝑠 83270  𝑃𝑃𝐸 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = (𝑃𝑃𝐸 +𝑃𝑃𝐸𝑡 )/2 = (12360+12612)/2 = 6.67 𝑡 𝑡−1 1 (𝑃𝑃𝐸𝑡 +𝑃𝑃𝐸𝑡−1 )/2  𝑃𝑃𝐸 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑆𝑎𝑙𝑒𝑠𝑡 = 0.15 (𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡 +𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡−1 )/2  𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑡 = ( 11606+14435+1002 +(11675+14798+707)/2) = 24.65 1100 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛  𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑢𝑠𝑒𝑑 𝑢𝑝 = (𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠 +𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑡 𝑐𝑜𝑠𝑡𝑠 = 𝑡 𝑡−1 )/2 17997 = 0.66 = 66 𝑝𝑒𝑟𝑐𝑒𝑛𝑡 ( 11606+14435+1002 +(11675+14798+707)/2) Prof. Alexander Liss Financial statement analysis 81  2 Analyzing intangible assets Accounting for intangible assets  Definition: Assets that  lack physical substance  are intended to serve the business operations on a permanent basis  cannot be assigned to financial or tangible assets  Distinction  internally generated intangible assets (mostly expensed through the income statement)  externally bought intangible assets (capitalized on the balance sheet)  Examples: Patents, customer lists, usage rights, trademarks, licenses, copyrights, and publishing rights Prof. Alexander Liss Financial statement analysis 82  2 Analyzing intangible assets Externally bought intangible assets  Distinction  Finite intangible assets (subject to amortization)  Indefinite intangible assets (subject to annual impairment test)  Common types of intangible assets recognized in acquisitions:  Marketing-related intangible assets: such as trademarks and Internet domain names  Customer-related intangible assets: such as customer lists and customer contracts  Artistic-related intangible assets: such as plays, books, and videos  Contract-based intangible assets: licensing, lease contracts, franchises, and royalty agreements  Technology-based intangible assets: patents, in-process research and development, software, databases, and trade secrets Prof. Alexander Liss Financial statement analysis 83  2 Analyzing intangible assets Intangible asset disclosure of SAP (2015) Source: SAP AG annual report, 2015, p 154. Prof. Alexander Liss Financial statement analysis 84  2 Analyzing Goodwill Accounting for Goodwill  Definition: Difference between the purchase price and the net asset value of the acquired company  Goodwill is considered an indefinite intangible asset subject to annual impairment testing  Accounting for M&A deals: 1. Recognize and revalue all assets/liabilities of the target 2. Determine Goodwill as the residual between purchase price of firm subtracted by net assets (assets-liabilities) Prof. Alexander Liss Financial statement analysis 85  2 Analyzing Goodwill Purchase price allocation of Bayer/Monsanto deal (2017) Source: Bayer AG annual report, 2018, p 202. Prof. Alexander Liss Financial statement analysis 86  2 Analyzing Goodwill Goodwill  Goodwill has become a substantial position on many balance sheets  Example: Proximus 2023 (Goodwill about 25 percent of total assets) Source: Proximus Group integrated report, 2023, p 190. Prof. Alexander Liss Financial statement analysis 87  2 Impairment test Indefinite intangible assets and Goodwill: Impairment test  Conducted annually and in case of a triggering event Is the amount of Goodwill still representative? NO YES Calculate the value of impairment Keep amount on the balance sheet Expense the value of the impairment to the income statement Adjust balance sheet position Prof. Alexander Liss Financial statement analysis 88  2 Impairment test Long lived assets (definite intangible assets and PPE): Impairment test  Procedure of a potential impairment Has a situation been identified that suggests an impairment? YES NO Normal accounting for long-lived Calculate the value of impairment assets Was the asset previously revalued? YES NO Deduct the value of the impairment from the Expense the value of the revaluated surplus. Any impairment to the income excess impairment is statement charged to the income statement Prof. Alexander Liss Financial statement analysis 89  2 Analyzing Goodwill Impairment test disclosures of Goodwill  Example: TeleSign unit of Proximus 2023 Source: Proximus Group integrated report, 2023, p 191. Prof. Alexander Liss Financial statement analysis 90  2 Analyzing Goodwill Goodwill impairment: Example  In 2020, Heidelberg Cement AG reported a goodwill impairment of 2.7 Billion Euro Source: Heidelberg Cement AG annual report, 2020, p 144. Prof. Alexander Liss Financial statement analysis 91  2 Analyzing Goodwill Analysis of Goodwill  Investigate the relation of Goodwill to total assets/net income:  Is Goodwill a critical position?  Pay attention to disclosures about Goodwill impairment testing:  Are the information extensive (boilerplate)?  What are the valuation metrics?  Do companies provide sensitivity analyses with regard to their impairment calculations?  Calculate (potential) impairment amounts in relation to total assets/net income:  How likely are future impairments?  Do other firms in the same industry have similar impairments at that time? Prof. Alexander Liss Financial statement analysis 92  2 Common size analysis  Common size analysis illustrates importance of certain balance sheet / income items  Comparison to other firms is called cross-sectional analysis  Comparison of one firm across time is called trend analysis  The balance sheet  Asset item/Total assets  Liability item/Total liabilities (Chapter 3)  The income statement (Chapter 4)  Income statement item/Total sales Prof. Alexander Liss Financial statement analysis 93  2 Common size analysis  Example of a trend analysis for Volkswagen AG (2020-2023, taken from Yahoo Finance):  e.g. the ratio of current assets to total assets remains about constant from 39.81 percent in 2020 to 39.91 percent in 2023 (year 2021: 37.90 percent; year 2022: 39.74 percent) Prof. Alexander Liss Financial statement analysis 94  2 Common size analysis  Example of a cross-sectional analysis for selected automobile companies (Volkswagen, BMW, Mercedes, Renault; taken from Yahoo Finance):  Ratio of operating income/sales indicates that there large differences with regard to profitability: Volkswagen (around 7.50 percent), BMW (around 10.77 percent), Mercedes (around 10.07 percent), Renault (7.52 percent) Prof. Alexander Liss Financial statement analysis 95  2 The Continuing Case: Bekaert SA Questions: 1. Analyze the balance sheet structure of Bekaert using a common size analysis (trend analysis). Use the fiscal years of 2021, 2022, and 2023 to make statements about the rising/falling importance of assets. 2. Calculate operating and excess cash for Bekaert. Use for operating cash two percent of total sales. Is the amount of excess cash justifiable? Explain your reasoning. 3. Analyze the property, plant, and equipment (PPE) position of Bekaert. Calculate PPE turnover, PPE- useful life, and PPE-percent used up. What inferences can you draw about the PPE of Bekaert? Prof. Alexander Liss Financial statement analysis 96  2 The Continuing Case: Bekaert SA Asset side of Bekaert SA-2023 Prof. Alexander Liss Financial statement analysis 97  2 The Continuing Case: Bekaert SA Asset side of Bekaert SA-2022 Prof. Alexander Liss Financial statement analysis 98  2 The Continuing Case: Bekaert SA Asset side of Bekaert SA-2021 Prof. Alexander Liss Financial statement analysis 99  2 The Continuing Case: Bekaert SA PPE of Bekaert SA-2023 Prof. Alexander Liss Financial statement analysis 100  2 The Continuing Case: Bekaert SA PPE of Bekaert SA-2023 Prof. Alexander Liss Financial statement analysis 101  2 The Continuing Case: Bekaert SA PPE of Bekaert SA-2022 Prof. Alexander Liss Financial statement analysis 102  2 The Continuing Case: Bekaert SA PPE of Bekaert SA-2022 Prof. Alexander Liss Financial statement analysis 103  2 The Continuing Case: Bekaert SA Income statement of Bekaert SA-2023 Prof. Alexander Liss Financial statement analysis 104  2 The Continuing Case: Bekaert SA Solution: Prof. Alexander Liss Financial statement analysis 105  2 The Continuing Case: Bekaert SA Solution: 1. Analyze the balance sheet structure of Bekaert using a common size analysis (trend analysis). Use the fiscal years of 2021, 2022, and 2023 to make statements about the rising/falling importance of assets. General trends: Rise and fall in total assets from 2020 to 2023 (M&A and divestures) Trend is driven by inventories and cash and cash equivalents Loss in importance for cash and cash equivalents (around 21 percent in 2020 down to around 15 percent in 2023) Prof. Alexander Liss Financial statement analysis 106  2 The Continuing Case: Bekaert SA Solution: 2. Calculate operating and excess cash for Bekaert. Use for operating cash two percent of total sales. Is the amount of excess cash justifiable? Operating cash: 5004 (mio. Euro) * 2 percent= 100 mio. Euro Excess cash= 632-100=532 mio. Euro Interpretation: Given that Bekaert SA has lost many assets within the last year (e.g. divestments), the high excess cash rate might be justifiable. Additionally, if Bekaert SA intends make future investments, cash will be necessary (see next slides). Prof. Alexander Liss Financial statement analysis 107  2 The Continuing Case: Bekaert SA Solution: 3. Analyze the property, plant, and equipment (PPE) position of Bekaert. Calculate PPE Turnover, PPE useful life, and PPE-percent used up. What inferences can you draw about the PPE of Bekaert? 𝑆𝑎𝑙𝑒𝑠𝑡 5004 𝑃𝑃𝐸 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = = = 4.25 (𝑃𝑃𝐸𝑡 + 𝑃𝑃𝐸𝑡−1 )/2 (1118 + 1238)/2 1 (1118 + 1238)/2 = = 0.24 𝑃𝑃𝐸 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 5004 Interpretation: Bekaert SA needs about 24 cents to generate one euro of sales. This number seems large, but can be explained by the capital intensive industry, Bekaert SA is operating in. Prof. Alexander Liss Financial statement analysis 108  2 The Continuing Case: Bekaert SA Solution: 3. Analyze the property, plant, and equipment (PPE) position of Bekaert. Calculate PPE Turnover, PPE useful life, and PPE-percent used up. What inferences can you draw about the PPE of Bekaert? (𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡 + 𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡−1 )/2 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 = 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑡 Problem for Bekaert SA: For calculating of depreciable assets, we need to exclude land and assets under construction. However, land and buildings are not separated in the notes section Solution: We do not include “Land and Buildings” in our calculation (2909 + 104 + 17 + 3041 + 117 + 18)/2 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 = = 33.36 87 + 5 + 1 Prof. Alexander Liss Financial statement analysis 109  2 The Continuing Case: Bekaert SA Solution: 3. Analyze the property, plant, and equipment (PPE) position of Bekaert. Calculate PPE Turnover, PPE useful life, and PPE-percent used up. What inferences can you draw about the PPE of Bekaert? 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛𝑡 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑢𝑠𝑒𝑑 𝑢𝑝 = (𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡 + 𝐷𝑒𝑐𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡 𝑐𝑜𝑠𝑡𝑠𝑡−1 )/2 Problem for Bekaert SA: Accumulated depreciation also includes impairment amounts Solution: We try do get rid of impairment amounts as good as possible (exclude both 2023 and 2022; you can even go further back in time to make the calculation more accurate) 2427 + 93 + 7 − 10 − 48 2469 𝑃𝑒𝑟𝑐𝑒𝑛𝑡 𝑢𝑠𝑒𝑑 𝑢𝑝 = = = 0,80 = 80% (2909 + 104 + 17 + 3041 + 117 + 18)/2 3103 Interpretation: PPE of Bekaert seems to be older quality. Thus, significant investments in new and costly PPE might be possible in the near future. This can affect earnings and cash flows Prof. Alexander Liss Financial statement analysis 110