PART 2

PROFIT AND LOSS ANALYSIS

BALANCE SHEET ANALYSIS

CHAPTER 1 – PROFIT AND LOSS
( P&L)
 I - INTERIIM BALANCE
Interimbalance is an extra-accounting
document, based on the profit and loss
account, to analyse the structure of the
profit and loss and to make informed
management choices

The table shows 9 balances, disaggregating operating, financial and

exceptional activities. Three are particularly important:
• Commercial margin that measures the performance of commercial
enterprises.
• Added value measures the wealth created by the company.

• EBITDA measures the company’s ability to generate cash through its

operations.
 COMMERCIAL MARGIN =

This balance exists only for enterprises having a commercial (or mixed) activity. It allows us to assess the
performance of a trading company. It measures the gross margin left by the sales of goods.

Sale of goods
- cost of goods sold ( includes variation stocks of goods )

Commercial margin rate = commercial margin / turnover of goods VAT free

The highest the rate the biggest the profit for the company
 YEAR’S PRODUCTION ( YP )=
Industrial and/or services company

YP measures the gross production of the enterprise and includes elements valued at the selling price VAT free
(production sold) plus elements valued at the cost of production (finished product variation stock and capitalised
production)

Production sold ( turnover of finished products & turnover of services VAT free)
+ finished products in stock variation ( if final stock > initial stock )
- Destocking of production ( if final stock < initial stock )

+capitalised production

Growth rate of stock of Finished Products( FP) variation = ( stock FP n - (stock FP n-1)) / stock FP (n-1)
Growth rate of tax free turnover(T) = ( Tn - (Tn-1)) / T(n-1)
 ADDED VALUE ( AV ) =
• AV measures the economic weight of the company
• Thanks to the AV the company will pay different actors who contribute to the production
( employees, state, shareholders …)

The sum of the value added of enterprises gives « PIB »

Commercial margin
+ year’s production
- Cost of raw materials and other supplies
+/- Raw materials stock variation
- other purchases and external charges

Growth rate of AV = ( AVn - (AVn-1)) / AV(n-1)

The variation comes from :

* increase or decrease of the activity
* good or poor control of external consumption
* wheather or not outsourcing
EARNING BEFORE INTEREST AND DEPRECIATION
AMORTIZATION ( EBITDA ) =

EBITDA measures the economic performance of the company independently of its

financing elements (financial results are not retained), independently of its investment
choices (amortizations are not retained), independently of its exceptional results.

Added value
+ operating subsidy
- Taxes and duties
- Staff expenses ( includes wages and employer’s social security contributions )
 EBITDA RATIOS :

EBITDA growth rate = ( EBITDA n - (EBITDA n-1)) / EBITDA (n-1)

The highest the rate the biggest the performance for the
company

Economic profitability rate = EBITDA / tax free turnover

 OPERATING RESULT =

Measures the industrial and commercial performance of a company

EBIT
+ depreciation write back and provision write back
+ other operating products
- Depreciation and provisions
- Other operating charges

Operating result RATE = operating result / TAX FREE TURNOVER

 CURRENT RESULT BEFORE TAX ( CRBT ) =

Operating result
+ financial products
- Financial charges

CRBT shows the investment policy of the company :

loans  interest
Financial profitability rate = CRBT / tax free turnover
EXCEPTIONAL PRODUCTS =

Exceptional products
- Exceptional charges

Does not depend on the current activity of the company

PROFIT AND LOSS ( P&L)=

Curent result before tax

+/- exceptional result
- employee profit sharing plan
- income tax
P&L is the last result ; it can be distributed to the shareholders or
used for cashflow .

Global profitability rate : net result / tax free turnover

ANALYZE OF THE INTERIM
BALANCE

To conduct the analysis, the balances must

be compared over time or with the balances
of other businesses in the same industry.
The analysis involves calculating activity
ratios and profitability ratios.
Interpretation depends on the sector of
activity in which the company operates.
 ACTIVITY RATIOS PROFITABILITY RATIOS
Variation of the turnover Commercial margin rate
Commercial margin/ turnover of
goods VAT free

Only for commercial cie

Added Value rate
Variation of the added value added value/ turnover VAT free
Employees weight
Is the cie growing up ? ( employees & employee sharing
profit plan ) / added value
State weight:
tax (included Income taxe)/ added value
Loan weight:
interest / added value
Economic profitability rate
EBITDA/ turnover VAT free
Global profitability rate
Net result/ turnover VAT free
Financial rate of return
net result / shareholders equity
CHAPTER 2 – CASH FLOW
 CASH FLOW
For its financing needs (investments,
increased working capital, etc.), the
company must obtain resources.
CASH FLOW is an internal resource
of the company

Cash flow can be calculate in 2 ways :

• from EBITDA
• From net result ( P&L)
 CASH FLOW

Cash flow represents the resource made available

during the year and which will remain at the disposal
of the enterprise. This resource will be used to:
- pay any dividends.
- Financing the replacement of production
tools;
- financing the growth of the company, either
by allowing new investments or by helping to repay
loans.
Cash flow =ressources paid –expenses paid

WARNING : cash flow in not equal to profit and loss:

Amortization and write back are calculated without generating receivables and
payables

excpetional operations linked to investments are not included in the cash flow
1 - CASH FLOW CALCULATED FROM P&L :

+ profit and loss result

+ amortization or depreciation of the year

- write back of amortization or depreciation of the year
+ accounting value of investments sold
- sale value of investments sold
= cash flow
2 – RATIO LINKED WITH CASH FLOW

• Debt capacity = financial debt ( MT &LT) / cash flow

The higher the debt capacity is the better the company will pay back it
debt.
Usually this ratio is inferior to 3.

For example if it is equal to 2 , it will mean the company’s debt

represents 2 cash flow years.
 PROFITABILITY AND MANAGEMENT RATIOS

Ratios to be use :

Profitability ratios

• Economic profitability = net result / gross assets

• Return on equity = net result / share holders equity

• Net margin rate = net result/turnover VAT free

• Economic profitability rate = EBITDA /turnover VAT free

• Commercial margin rate= commercial margin / turnover of goods VAT free

• Reimbursement capacity ratios

• debt capacity ( MT & LT ) / cash flow
We get the number of years of cash flow needed to pay off our financial debts, it should not exceed 4

Weight on added value

• Employees weight= (employees+ employees profit sharing plan) / added value
• State weight = (tax including income tax) / added value
• Loan weight = interest/ added value
• Sharholders weight= Dividend / added value

• Part of the cie = (Cash flow – dividend) / added value

PROFIT &LOSS

EXPENSES REVENUES
Operating expenses : Operating
products
Purchasing of goods 1 737 Sales of good 4 534
Goods stock variation - 45 Sales of manufacturing 37 420
Purchasing of raw 13 348 TOTAL TURNOVER 41 954
materials
Raw materials stock variation 658 Production in stock 150

Other purchases & external

expenses
4 034 Capitalised production 135
Tax ( except income tax ) 796 Operating subsidies 522
wages 6 445 depreciation write back 1 422
Social security charges 2 994 Other products 147
Amortizations on asset 9 319
depreciation for receivables 737
depreciation on risk 980
Other charges 20
 Intermediate balance
Revenues Expenses
Sales of goods Sold goods acquisition cost Commercial margin
Sales of manufacturing &
services
Production in stock Or destocking of production
Capitalised production
Total Total Year’s production
Year’s production
Commercial margin Consumption from third parts
Total Added value
Added value Tax excepted income tax
Operating subsidies Wages ( including social security charges ) EBITDA
Total Total
EBITDA if >0 Or EBITDA if<0
Depreciation write back Amortizations & depreciations
Transfert of charges
Other products Other charges
Total Total OPERATING RESULT
Operating result if >0 Operating result if < 0

Financial revenues Financial expenses

Total Total CURENT RESULT BFORE TAX
Exceptional revenues Exceptional expenses EXCEPTIONAL RESULT
Curent result before tax if >0 Or curent result before tax if <0
Exceptional result if >0 Or exceptional result if<0
Employee profit sharing plan
Income tax
Total Total NET RESULT

Sale value of investment sold +/- VALUE OF INVESTMENT SOLD

Accounting value of investment sold
1 - CASH FLOW CALCULATED FROM P&L :

+ profit and loss result

+ amortization or depreciation of the year

- write back of amortization or depreciation of the year
+ accounting value of investments sold.
- sale value of investments sold
= cash flow