Analysis of Activity - PDF

# L'analyse de l'activité ## Compétences attendues Analyze the income statement, determine the different intermediate management balances, justify the adjustments of the intermediate management balances table, comment and interpret the different intermediate management balances, determine the self...

# L'analyse de l'activité ## Compétences attendues Analyze the income statement, determine the different intermediate management balances, justify the adjustments of the intermediate management balances table, comment and interpret the different intermediate management balances, determine the self-financing capacity according to the additive and subtractive methods, interpret the self-financing capacity. The analysis of the activity makes it possible to assess the company's growth, to measure its capacity to generate profits and to understand what are the explanatory factors of its performance. The company's activity whose consequences are summarized in the income statement must be analyzed from two angles: - Is the result satisfactory, in other words, is the company profitable? To answer this question, we will have to calculate intermediate management balances (in a general accounting plan version or in a redacted version); - Does the activity allow the company to self-finance or distribute dividends? To find out, we will determine the self-financing capacity (CAF). **Attention:** The calculation of SIGs takes into account the planned reform of the presentation of financial statements by the ANC. If, however, the final version is not in line with the initial project on certain points, corrections would be proposed via the UE forum. ## Section 1: Les SIG (intermediate management balances) ### I. The contribution of SIGs in a financial analysis The income statement distinguishes products and expenses by category (operating, financial, exceptional) and calculates net accounting income but it does not show all the components of this income, ie how this income was obtained. It does not therefore provide a precise analysis of profitability. ## Section 2: Les SIG du PCG SIGs, calculated from the income statement, fill this gap and present other indicators that help to understand the origin of profit or loss. These SIGs can be calculated using two methods: the PCG method or the method with adjustments. Whatever the version of SIGs used, they must be commented on using ratios. The following diagram summarizes the place of these SIGs in financial analysis: Questions: Is the profit sufficient? Information sources: Income statement Treatments: - SIG PCG - SIG redacted Analysis: - Ratios and comments **To remember:** SIGs break down the items in the income statement to analyze the company's performance. ### II. The SIGs of the PCG The SIGs of the PCG reclassify the accounts for expenses and revenues into nine indicators: - Commercial margin; - Production of the year; - Added value; - Gross operating surplus; - Operating result; - Current result before tax; - Exceptional result; - Net accounting result; - Net result of disposals. **Attention**: In the exam, all or part of these balances may be required without any help (table to complete) being provided. # Principles of the General SIGs The following diagram summarizes the steps to take to calculate all the SIGs of the PCG (except for the net result of disposals). * **Sales of goods** > - Cost of goods sold > - Commercial margin * **Production of the year** > - Commercial margin > - Consumption from third parties > - Added value > - Tax and duty payments > - Personnel costs > - Gross operating surplus > - Other products and provisions > - Other expenses and DADP > - Operating result > - Financial expenses > - Financial products > - Current result before tax > - Exceptional result > - Result of the year > - Participation The majority of these SIGs (except commercial margin and production) are calculated in a cascade, meaning their calculation depends on the previous SIG by adding certain products and subtracting certain expenses ## Calculation and meaning of the SIGs SIGs have two objectives: - To break down net income according to its origin (operating, financial, exceptional); - To analyze the most important component in detail, the operating result. # The decomposition of the net accounting result SIGs of the PCG break down the net accounting result into three levels: operating, financial and exceptional. We have: - Operating result = (products - expenses) of operating > - Sum of accounts balances (70 to 75 + 781) – 2 accounts balances (60 to 65 + 681); - Financial result = (products - expenses) of a financial nature > - Sum of accounts balances (76 + 786) – Sum of accounts balances ( 66 + 686); - Exceptional result = (products - expenses) of an exceptional nature > - Sum of accounts balances (77 + 787) – Sum of accounts balances ( 67 + 687). The following application illustrates this decomposition. ## Application N° 4 The following table shows the income statement of a company, SIMPLIFIÉE, for the last two years. There are no provisions or reversals of a financial nature. ### Income statement of SIMPLIFIÉE company | | N | N-1 | |--------------------|---|-----| | Sales of goods | 1000 | 900 | | Disposal products of tangible assets | 5 | 5 | | Purchase of goods | 510 | 430 | | Inventory change | -30 | 20 | | Outside expenses | 55 | 50 | | Staff costs | 60 | 65 | | DADP of operations | 45 | 40 | | Book values of tangible assets disposed | 65 | 65 | | Financial products | 10 | 15 | | Financial expenses | 40 | 30 | | Tax on profits | 90 | 95 | | Net accounting result | 180 | 185 | Even though we haven’t yet discussed the detailed calculation of SIGs, we can already easily determine the operating result, the current result before tax and the exceptional result. **To note**: It can be noted in the above diagram that, oddly, the PCG does not explicitly show the financial result; it is incorporated into the current result before tax (RCAI), with: RCAI = Operating result + Financial result ## The presentation of the income statement in a list format quickly makes it possible to calculate five of the nine SIGs of the PCG ### Presentation of the Income statement of SIMPLIFIÉE company | | N | N - 1| Variation | |-----------------|------|------|-----------| | Sales of goods | 1 000| 900 | | | Disposal products of tangible assets | 5 | 5 | | | Total operating products | 1 005 | 900 | | | Purchases of goods | 510 | 430 | | | Inventory change | -30 | 20 | | | Outside expenses | 55 | 50 | | | Staff costs | 60 | 65 | | | DADP of operations | 45 | 40 | | | Book values of tangible assets disposed | 65 | 65 | | | Total operating expenses | 705 | 605 | | | **Operating result (a)** | **300** | **295**| **+ 1,7%** | | Financial products | 10 | 15 | | | Financial expenses | 40 | 30 | | | **Financial result** | **-30**| **-15** | | | **Current result before tax (b)** | **270** | **280** | **-3,6%** | | Exceptional products | | | | | Exceptional expenses | | | | | **Exceptional result (c)** | **90** | **95** | | | **Net accounting result (d)** | **180** | **185** | **-2,7%** | | **Net result of disposals (e)** | **-60** | | | (a). Total operating products - Total operating expenses (b). Operating result + Financial products - Financial expenses (c). Exceptional products - Exceptional expenses (d). Current result before tax + Exceptional result – Participation by employees in profits – Tax on profits (e). Proceeds from disposal of tangible assets - Book values of tangible assets disposed. This first breakdown of the net result allows us, when presenting a diagnostic, to have a better understanding of the breakdown of the result. The profit is indeed slightly lower, but this is essentially due to its financial component (higher financial expenses). The operating result has increased by 1.7% in year N despite a write-down of disposals. More generally, the exceptional result, not being a recurring component, if its share is significant in the result, our judgment on profitability will be based on the operating result or the current result. ## The decomposition of the operating result The operating result, being the essential component, the table of SIGs provides a detailed analysis. ### a. The commercial margin The commercial margin represents the gross profit generated by the commercial activity of companies. **Commercial margin = Sales of goods – Cost of goods sold.** Commercial activity consists of buying and reselling goods. Goods are goods purchased to be resold as is, without any transformation. The commercial margin is obviously essential in companies that only have this one activity. We must make sure that the cost of goods sold is calculated and not the cost of goods purchased. <start_of_image> It is possible to check that the majority of the production is sold and not stored: it is important that the company can sell its production. ### b. Production of the year Production of the year is equal to: **Production = Sales of goods and services (turnover related to industrial and service activity including service provision) + Production in stock + Production immobilized** While sales of goods are valued at selling price, including the profit margin, production in stock and immobilized production are valued at production cost. This is therefore a non-homogeneous indicator whose usefulness for diagnostics is limited. **To note**: - If production in stock increases, production in stock (SF – SI) is positive. This means that the company has produced more than it has sold. - If production in stock decreases, production in stock (SF – SI) is negative. This means that the company has produced less than it has sold. ### c. Value added (VA) VA is equal to the net increase generated by a company's operations. It represents the company's relationship with its suppliers (excluding suppliers of goods). It is calculated as follows: **VA = Commercial margin + Production of the year – Consumption from third parties (i.e. raw materials and other purchases and outside expenses).** The gross wealth thus created then makes it possible to compensate the different factors of production, including: - The government (tax and duties and tax on profits, accounts 63 and 695) through the public services that the company benefits from; - Staff (salaries and social charges, accounts 64 and participation of employees in the result, account 691); - Creditors (interest on loans, accounts 66). The balance is then available to the company in order to: - Renew its fixed assets (depreciation); - Remunerate its shareholders (dividends); - Increase its equity (reserves). A diagnostic on the level of net accounting income can therefore be based on added value and on the breakdown of this wealth between the different factors of production. ### d. EBE (earnings before interest and taxes) The EBE represents the wealth generated by operations but before taking into account depreciation and amortization. It is the preferred indicator of financial analysts because it is neutral in terms of both investment policy and financing policy. It is calculated as follows: **EBE = Value added + Subsidies (excluding quotas of investment subsidies allocated to results) – Tax and duty payments – Staff costs** The EBE makes it possible to assess the pure performance of operations as it is independent of: - Depreciation, impairment and provisions policies sometimes somewhat subjective; - Financing policy (equity does not generate any costs unlike borrowing); - Exceptional items (not likely to recur). Furthermore, the EBE does not contain any calculated and non-monetary items like depreciation (see section 2 on CAF later), it can also be defined as working capital. It is composed of operating revenues received or receivable less operating expenses paid or payable. **Attention:** The term EBE assumes that this balance is always a surplus, which is far from being the case (one speaks of a lack of gross operations). English-speaking countries use a similar indicator to EBE: EBITDA (Earnings before interest, taxes, depreciation and amortization) ### e. REX (operating result) This refers to the result arising from the "normal" activity of the company (excluding the impact of financial structure). It is calculated as follows: **REX = EBE + Other products + Proceeds from disposal of intangible and tangible fixed assets + DADP of operations + Quotas of investment subsidies allocated to results – Other expenses – Book values of intangible and tangible fixed assets disposed – DADP of operations** **To note**: It is possible to check that the operating result obtained within the framework of the PCG SIGs is correct by comparing it to the result obtained from the income statement: total operating revenues – total operating expenses. ## Application n° 4 - Continued SIMPLIFIÉE company is a commercial company. The calculation of the commercial margin is therefore essential. It is €520 in year N: sales of goods (€1,000) - cost of goods sold (€510 - €30, i.e. €480). This margin thus generated must make it possible to absorb other expenses (outside expenses, staff costs, etc.). SIMPLIFIÉE company only sells goods; production is therefore nil. Added value is €465 in year N, i.e. €520 - €55. The company has therefore created €465 of its own wealth. This added value allows it to absorb other expenses (personnel, DADP, financial expenses or even corporation tax). The gross operating surplus amounts to €405 in year N, i.e. €465 - €60. This is therefore SIMPLIFIÉE company's potential working capital. The operating result amounts to €300 in year N, i.e. €405 + €5 - €65 - €45. This result takes into account the consumption of fixed assets and will make it possible to remunerate creditors (banks and financial institutions) and the shareholders of SIMPLIFIÉE. It is here reduced by a write-down of disposals of €60. ## The other elements of the net result Four accounting items explain the passage between the operating result and the net result. ### The current result before tax It makes it possible to measure the profitability of the company's current activity. **RCAI = Operating result + Financial products - Financial expenses** The existence of financial products comes from the company's investment policy in financial securities. This is not generally the company's core business but an opportunity for investment linked to a positive cash flow. Null financial products are therefore not problematic. The existence of financial expenses comes mainly from the cost of the company's debt. As long as the operating result makes it possible to cover the company's expenses and the debt is not too high, these expenses do not therefore call into question the company's profitability. It is therefore frequent that the current result before tax is lower than the operating result. ### The exceptional result In contrast to the current result, the exceptional result brings together products and expenses directly related to a major and unusual event, such as accounting entries of a purely tax nature, for example, changes in method recorded in the result or corrections of errors. **Exceptional result = Exceptional products - Exceptional expenses** In the income statement, the breakdown of products and expenses is not provided. It is necessary to consult the annexes of the financial statements to know it. When analyzing performance, it is essential to check that the net result is not explained mainly by exceptional items (because a major and unusual event is not likely to recur). **Attention:** The definition of exceptional results will change with the opening of financial years starting on January 1, 2025. The capital gains and losses from divestment operations as well as the quotas of investment subsidies allocated to results will be recorded in the operating result. ### The participation of employees in the result and tax on profits These two last expenses are not included in the PCG classification for operating/financial/exceptional because they depend on the result to be calculated. They therefore intervene at the end of the accounting process. **Net accounting result = RCAI + Exceptional result – Participation of employees in the result – Tax on profits** **To note**: The exceptional result is recorded in the net result formula with a "+" sign, but if it is negative, it is clear that this exceptional result reduces the net accounting result. It is essential that at this stage, the net result obtained by the SIGs is identical to the initial net result of the income statement: all products and expenses have been taken into account in the calculation. ### The net result of disposals This SIG is not calculated in a cascade and makes it possible to calculate the result related to divestment operations. It is part of the operating result for intangible and tangible fixed assets and part of the financial result for financial fixed assets. **Net result of disposals = Proceeds from disposal of intangible, tangible and financial fixed assets - Book values of intangible, tangible and financial fixed assets disposed.**