Edited by Massimo Ferracci

LINK First part : https://schoolofbanking.it/2021/12/07/analisi-di-bilancio/

Part Two

Analysis and indices
Once the balance sheet has been reclassified according to the methods described in detail (I would like to point out
once again, those discussed here are just some of the many reclassification methods
available but which in our opinion are the ones that best meet our needs, as well as the most
used) you can proceed to carry out the actual analysis using three techniques:
– analysis by indices;
– margin analysis;
– flow analysis
Economic indices
Economic indicators measure the profitability of the company, understood as the ability to generate income in the future.
positive (useful). Those indices are economic if they have, at least in the numerator or denominator, a value
economic (i.e. an item taken from the Income Statement).
We list below the profitability (economic) indicators, while providing examples and brief explanations.
of the same.
ROE expresses the profitability of the entrepreneur's risk capital.
ROE = RN/PN = net operating result (net profit) / shareholders' equity (excluding the profit from it)
(intended for distribution)
ROE indicates the return on capital invested by shareholders or the entrepreneur. In other words, it is the summary
of the interest accrued, as a result of management, on the equity invested in the company. A company, in order to be able to
attract new venture capital, should provide a ROE higher than the rates of return of alternative investments.

In any case, the ROE of a company should never be lower than the guaranteed rate for
risk-free investments. Below this limit, in fact, the risk would not be adequately remunerated.
of shareholder savers. To be more precise, the NP should be calculated as the average between the value
Initial and final. In case of loss, the ROE is negative. This means that the economic imbalance is as follows:
serious enough to erode one's own resources.
If we want to delve further we can get to the calculation of the so-called Gross ROE which is not
other than the income before taxes in the numerator. This way the yield is not influenced by
State economic policies and in particular from fiscal evidence.
Cash flow/Net equity: it is given by the ratio between cash flow (profit + depreciation + provisions) and
Net worth. It expresses the return on equity in terms of cash flow. That is, how many units of cash
flow produced by the company for every 100 units of invested equity. The usefulness of this index lies in the fact that
manages to overcome a limitation that the use of ROE faces. This limitation is represented by the policy of
depreciation adopted by the company. In fact, companies that adopt depreciation policies
early repayment, aggressive depreciation policies, result in lower profits than companies
which adopt opposite amortization policies. This being observed, in order to free the ROE from the effects of the
depreciation and accrual policies it is sufficient to add to the net profit the amount of
depreciation and provisions.
Operating profit/Net equity: is given by the ratio between operating profit and net equity. It expresses
the return on equity in terms of operating profit. That is, how many units of operating profit
the company produces for every 100 units of invested equity. This index also aims to fill a gap
Another limitation of ROE is that the company's profit is often influenced (in some cases manipulated) by factors
which influence its meaning. For this reason, this value must be adjusted or
adjusted for these factors. The adjusted profit is not available in the balance sheet but must be calculated. The calculation
it is the result of an analyst's choice which will lead to an increase in profits for all extraordinary items and/or
anomalous, which he will deem appropriate. For example, if the company analysed has benefited, during the
of the exercise, of a tax break not recognized to other competing companies (to favor
employment or for a state bailout), or sold an asset obtaining a large capital gain,
will obtain a profit significantly different from the normal one for the sector. In our case, to sterilize the profit from
We have purified these effects from all the extra characteristic components.
Production value/Net worth: it is given by the ratio between production value and net worth
net. It expresses the profitability of equity capital in terms of production value. That is, how many units of
production value produced by the company for every 100 units of invested equity. This indicator is
It proves to be very useful when analyzing start-up companies where the production value is often
the only positive item on the income statement.
Much more interesting for understanding the performance of the company is the ROI, that is, the profitability of all the capital.
invested (therefore also that which is borrowed).
ROI = RO/A = operating profit/total assets (adjusted)
ROI tells us the profitability of the characteristic management (which is the heart of any business) referred to the
company size (represented by all invested capital, including third-party capital taken on)
Total assets are represented by all the investments necessary to carry out the business.
Typical. For this reason, it is necessary to exclude, for example, temporary liquidity investments and real estate.
not necessary for the business (such as those rented temporarily). All this makes it clear how the calculation
of ROI is influenced above all by the notion we give to the concept of invested capital or total assets.
Concretely and to be as precise as possible according to the most illustrious authors the total activity is composed of
from the sum of: PN, bonds, convertible bonds, debts to banks over 12 months, debts to others
financiers over 12 months, financial debts to group over 12 months, debts to banks within 12 months, debts to others
Lenders within 12 months, long-term bonds, long-term convertible bonds, other financial debts within
12 months and financial debts to companies within 12 months. Due to its importance, ROI is rightly considered the
“thermometer” of the company’s profitability.

ROA = RO/Total Assets
The ROA summarises the cost-effectiveness of the characteristic economic management regardless of the operating methods.
financing and the tax system adopted. It is clearly influenced by the creation of new
investments and the level of depreciation. In fact, companies that make investments to achieve
future revenues have a lower ROA than companies that have the same operating income but do not
make new investments.
Cost of money for the company
The company's debt consists of both onerous third-party sources (passive loans, bonds, etc.) and
non-onerous sources (debt to suppliers, etc.).
ROD = financial charges/average (PC + PF)
There is an interesting relationship between ROE and ROI, called leverage.
ROE = ROI + (ROI – cost of debt capital) x (debt capital/equity)
where: cost of debt capital = financial costs/debt capital
The above formula reads as follows: the difference between the ROI and the cost of debt capital is affected
multiplier based on the ratio (of financial leverage) between debt capital and equity capital. Therefore, if
the ROI is greater than the cost of debt capital, the positive value, amplified by the multiplier, is added
to the ROI and determines a numerically larger ROE than the ROI. If, however, the cost of debt capital
exceeds the ROI, we will have a negative value which, once amplified by the multiplier, is subtracted from the ROI and
It therefore defines a lower ROE than the ROI. It is also worth noting that, in the desirable case of value
positive ROI difference – cost of credit capital, the multiplier effect rewards those who have dared more,
that is, companies that have a ratio between third-party funds (financing received) and own funds (equity
net) clearly unbalanced in favor of external debt. Conversely, in the unfortunate event
of a negative gap between ROI and cost of debt capital, the multiplier effect mitigates the damage to businesses
that have behaved more prudently, that is, that they have limited the acquisition of financing from third parties
to make greater use of domestic capital.
The ROI index can be easily broken down into two other important indexes, in fact:
ROI = RO/A = RO/V x V/A i.e. operating profit/sales x sales/total assets.
Let's try to understand these two new indices starting from the first.
ROS = RO/V = operating profit/sales
ROS is the index that identifies the profitability of sales, i.e. how much of the operating result
This characteristic arises from the volume of sales made. For example, large retailers
(supermarkets, hypermarkets, etc.) will have a relatively low ROS, because of their high sales volume
is not capable of generating much profitability. On the contrary, entrepreneurial activities based on high markups on
products will have a high ROS, because the small sales are offset by significant profitability.
This is the case for artisanal businesses and some commercial activities such as bars and clothing stores.
The second component born from the ROI rib is the Rotation of invested capital.
Turnover of invested capital = V/A = sales/total assets
This index gives us a measure of the sales capacity of the company considered, by comparing the data of the
sales to company size expressed by total invested capital (total assets).
In other words, the index just seen answers the question "how much does the analyzed company sell", not in
absolute value, but relative to the company size. However, it may be useful to see which part of the
The invested capital is to be attributed to the performance or failure of the index in question. For this purpose,
we can divide the turnover of invested capital into two new indices.

The first of these is the following:

Fixed capital turnover = V/AF = sales/fixed assets
And let's see how much the company's fixed assets contributed to sales.
The second one instead takes into consideration the other part of the invested capital, that is, the working capital.
Working capital turnover = V/AC = sales/current assets
If the value obtained is interesting (positively or negatively), there is still the possibility of further
breakdown of this last index for a more detailed analysis.
In fact, working capital can be broken down into its components, starting with receivables.
Accounts Receivable Turnover = V/C = Sales/Accounts Receivable
It defines how many times the entire trade receivables portfolio was renewed in the period considered.
From this index it can be deduced, for example, how a positive sales result can hide a
worsening of the customer portfolio, due to the swelling of bad or even uncollectable loans.
Furthermore, the working capital turnover ratio can be split into this other economic index which takes into account
inventory count.
Inventory turnover = CV/S = cost of goods sold/inventory
Which, by indicating how many times the stocks are renewed in the period, warns us of the possible occurrence of situations
unwanted “overstock” inside the warehouse.
From the rotation indices just seen we can obtain (simply by inverting the numerators with the
denominators) the so-called average duration indices, referring to the warehouse, to credits towards customers and to debts towards
Suppliers. Let's immediately look at the average inventory duration index.
Average inventory life = S/CV x 365 = inventory/cost of goods sold x 365 days
It expresses the average number of days that inventory lasts before a complete warehouse renewal.
The same reasoning can be applied to accounts receivable.
Average duration of accounts receivable = C/V x 365 = accounts receivable / sales x 365 days
The index provides important information on the average payment period granted to customers in days.
The same goes for debts to suppliers.
Average duration of debts to suppliers = D/Ac x 365 = debts to suppliers/purchases x 365 days
Which symmetrically expresses the average extension recognized by suppliers in days.
Asset indices
Through economic ratios, a company's functionality is quantified. With indexes
instead, the structural characteristics of the company are analysed, that is, the problems linked to the
composition of its financial situation.
In the asset indices, both in the numerator and in the denominator, values ​​taken from the table appear
heritage.
Let's first deal with the sources, that is, the part where the liabilities of the Balance Sheet are highlighted.
reclassified.
The first index that we are going to describe is necessarily the one that gives us a measure of the dependence on
third-party financiers.
Degree of financial autonomy = PN/P = net worth/total liabilities

This value indicates how much of 1 euro of financing comes from own resources (of the partners or
of the entrepreneur) of the company. Therefore, the higher it is, the more the company relies on self-financing to find
the funds to be invested in the uses listed among the activities. Conversely, the lower it is, the more the company resorts to
external sources to finance investments.
Once the degree of financial autonomy has been ascertained or, if we wish, symmetrically, as a complement
at 1 of the above index, the degree of financial dependence, it may be interesting to answer the
following question: “How much of the external financing comes from short-term debt?”
Current debt ratio = PB/P = current liabilities/total liabilities
Which provides the weight of short-term debt compared to total financial sources. We'll see, talking about
of financial indices, how dangerous a high current debt can be, especially for the
fact that it often goes to finance long-term investments.
Moving on to the analysis of the employment side of the Balance Sheet, we see the index that expresses their
degree of elasticity.
Degree of elasticity of employment = AC/A = current assets/total assets
This index highlights the weight of short-term investments in relation to total investments and therefore tells us
how elastic the active structure of the assets is.
Productivity indices
To fully understand the concept of productivity it is useful to remember some economic definitions
politics.
The term effectiveness measures how much of the established objective has been achieved.
The term efficiency refers, instead, to the relationship between the results achieved and the means employed. When
uses this parameter in the production process, it takes the more appropriate name of productivity,
because in the numerator there will be the production obtained and in the denominator the quantity of production factor
(capital or labor) that was necessary to employ for that production. Consequently, if, for example,
the company's policy aims at producing, in a certain period of time, one thousand units of a given product
product, the industrial combination that will be required to reach that level will be more productive,
fewer workers or fewer capital goods.
Having clarified the fundamental concept of productivity, let's look at the indicators that quantify it.
The first refers to the production factor of labour and therefore takes into consideration the number of employees, i.e.
not only employees, but also casual workers, working partners, collaborators and anyone else who has
participated in the production during the period considered.
Average revenue per employee = V/n. add. = sales/number of employees
It tells us how many sales each employee produced on average.
The second productivity index also refers to the labor factor and therefore to the number of employees.
Operating profit per employee = RO/number of employees = operating profit/number of employees
It expresses how much of the operating result each employee has produced (on average).
This other index also takes into consideration the capital factor, represented by
tangible and intangible assets.
Fixed assets per employee = (AF – financial assets)/no. of employees = (fixed assets – financial assets)/no. of employees

It indicates the quantity of assets available to each employee. It is not strictly an expression of
productivity, but rather a measure of the degree of "industrialization" of the company. Therefore, a high value
of the index is synonymous with high technology and automation in the production process.
Margin analysis
The margin analysis aims to ascertain the correspondence of the quality of the sources (SP assets) to
that of the uses (SP liabilities) or the compatibility between the sources and the uses taking into account the respective
payment and collection times and verify whether or not there is a lasting financial balance between
income and expenses. We should point out that the margin analysis has limitations, namely that it only allows
the instantaneous examination, which is not very significant, and the temporal one comparing the data from multiple company balance sheets.
We find three types of analysis:
– MS structure margin;
– net working capital (CCN);
– MT treasury margin
Let's look at the individual indices.
Structural margin represented by the difference between net capital PN (net of distributed profits or
attributed to reserves), and the net value of tangible fixed assets AI. This margin, in addition to verifying
how much the PN serves to cover the AI, expresses the conditions of long-term financial equilibrium
that is, the size of the equity capital compared to the investments, let's say long-term, and therefore to evaluate the
capitalization level (adequacy of own resources). If its value is positive, one can rely on
further debt and therefore new investments; if negative it means lack of own resources, imbalance
financial and therefore limited possibility of any autonomous expansion.
MS = PN – AI
Net working capital is measured by the difference between short-term assets and short-term liabilities (current assets
AC – current liabilities (PB). It expresses the portion of working capital financed with available resources.
of the company on a stable and permanent basis. For this reason, it represents an important condition of equilibrium.
financial and equity in the short and medium term.
Let's remember: CCL = Warehouse + cash + credits = AC
CCN (financial) = CCL – short-term financial sources (PB) = AC – PB
Cash margin is represented by the difference between the durable sources of equity and third-party capital and the
fixed assets and inventories.
MT = (AC – net inventory) – PB
Basically, it is enough to eliminate the net inventory value from the CCN
It indicates the company's ability to meet short-term financial commitments with immediate availability only.
and deferred
Even the cash margin, in order for there to be a financial balance, must be positive (even
if a limited negative value is tolerated in practice); if this does not occur it could happen that in
in the event of a request for immediate repayment of debts, there would be no financial means to meet them.

By transforming the cash margin, which is in absolute value, into a ratio, that is, into a relative value,
we'll have:
Cash flow ratio = (Li + Ld)/PB = (immediate liquidity + deferred liquidity)/current liabilities
Which tells us how much of 1 euro of short-term commitments we are able to honour with the availability of
brief summary of the enterprise.
Similarly, from the concept of working capital (also called net working capital), which is given
from the same terms as the cash margin plus inventories (immediate and deferred liquidity + inventories – liabilities
current, i.e. in the formula (Li + Ld + S) – PB), a value of the liquidity (or illiquidity) of the company is obtained which
takes into account the possibility of realising the stock (i.e. the possible short-term sale of the goods)
stored), if this becomes necessary to fulfill commitments due soon. Also
here it is possible to move from the margin to a ratio that is more familiar to us.
Current ratio = AC/PB = current assets/current liabilities
That is, how much of 1 euro of short-term debts are we able to pay with liquidity?
immediate and deferred and with the sale (always in the short term obviously) of stocks.
To conclude, the Immediate Liquidity Margin gives an idea of ​​the company's liquidity situation by taking
taking into consideration only monetary liquidity (bank or postal current account and cash on hand) and debts
currents. The formula is Li – PB .
Immediate liquidity ratio = Li/PB = immediate liquidity/current liabilities
It is the index of the company's monetary liquidity, because it shows how much of 1 euro of short-term debt is
we can settle with assets held in cash.
Financial statement
Through the financial statement, and above all with a correct reclassification of the same, we can
obtain information on: the company's financial, economic, and asset management. However, while
to analyze the first two, the reclassified balance sheet gives us information that can help the analyst to
To understand these dynamics, from the point of view of financial balance, the balance sheet alone is not enough.
This stems from the fact that, even if the balance sheet contains some information of a
financial, these are exclusively of a static nature, i.e. they refer to the end of the administrative period
considered.
The income statement does not provide any useful information at a financial level as it highlights
only the income dynamics that arise from the profit of the period: the CE is drawn up according to the criterion of
competence (the invoice issued but not yet collected gives rise to a credit which however is considered
revenue even if not collected and therefore useful) while for financial logic only those are important
management phenomena that involve cash movements. Consider, for example, the calculation of inventories.
whose value contributes to the profit even if there is no noteworthy monetary movement. The study
of financial dynamics is essential to allow a correct analysis of the company's performance,
while this is not possible with simple patrimonial and income methods (think of the sole use of indexes).
Through it we can understand the very important relationship between the company's ability to achieve a
income and at the same time to create cash or liquidity determined through the sum of all the
monetary income and expenditure.
For this reason, it may happen that an inexperienced analyst evaluates a company positively just because
be able to make a profit without analyzing the fact that it has very little cash in hand and that to pay
dividends will be forced to borrow money, weighing down its capital structure and
financial in the future.

The financial statement is therefore the document that aims to analyse the phenomena of generation and
Absorption of corporate cash flows: where does liquidity (cash/bank) come from and where does it go?
To determine the overall cash flow that caused the change in liquidity, the statement
financial starts from the economic result of the balance sheet (profit for the year), which is adjusted in light of all
those cost and revenue components that are so-called non-cash, that is, those that do not have a financial manifestation
(e.g. depreciation, provisions, write-downs, accounting adjustments, etc.).
To draw up an easy-to-interpret cash flow statement, it is necessary to aggregate the individual cash flows
that is, the individual cash inflows and outflows based on the management area from which they originated.
Generally speaking, the financial statement aims to explain in financial terms:
1. The financing activity (self-financing and external financing) of the company during
the exercise expressed in terms of changes in financial resources determined by adjusting, at the value
of the operating profit, a series of non-monetary values: just as an example, depreciation,
provisions, write-downs, accounting adjustments, etc.;
2. Changes in financial resources, determined by the income-generating activity carried out by the company
in the financial year, represented by the changes that occurred in the net working capital, i.e. the surplus
of short-term or current assets on short-term or current liabilities;
3. The investment activity of the company during the operation, purchase or disposal of assets;
4. Changes in the company's financial position that occurred during the financial year,
taking out/repaying mortgages, changes in net worth, etc.;
5. The correlations that exist between the sources of financing and the investments made.
The financial statement must be included in the notes to the financial statements. Although its failure to be presented is not
considered, in general and at present, as a violation of the principle of representation
truthful and correct presentation of the financial statements, however, this lack, in consideration of the relevance of the information
of a financial nature provided and its dissemination both on a national and international basis is assumed
limited only to the least well-endowed administrative companies, due to their smaller size. IAS No. 7
requires the submission of a cash flow statement drawn up on the basis of cash flows (and
similar values) even if allowing two different calculation alternatives. Since Italy has exercised the option
provided for by Community Regulation no. 1606 of 2002 regarding the adoption of international accounting principles
for companies to which these principles will apply, the legislator will have to adopt for the purposes of the reporting scheme
financial as provided for by IAS 7, revised edition in 1992 and still in force.
Clearly, the first two represent the fundamental analysis and the most important indicator of a correct
Economic and financial management of any business. Both self-financing and capital flow
net working capital generated by the company's income management is a fundamental element in the analysis
financial aspect of the budget. These values, in fact, constitute the link between the economic aspect and the financial aspect.
financial management, essential for understanding how the economic performance of management is
impact on the financial dynamics of the company.
Income management is made up of operations that result in revenues and expenses necessary for
produce such revenues, from which income is derived. These transactions are reflected in the income statement and represent
also the sources of financing of the company and in particular those of self-financing. From these it is generated
liquidity or net working capital required to finance future operations.
In the event that revenues exceed costs that require the use of liquidity or net working capital,
determines an increase in the same. This net increase represents the financial resources generated by the
income management, i.e. the liquidity or net working capital produced by the same. On the contrary,

the excess of costs that require the use of liquidity or net working capital determines a reduction
of the financial resource.
Whatever the concept of financial resource taken as the basis of the financial statement, the latter
comes to welcome within its bosom, first of all, the flow of this resource originated or consumed by the management
income. The flow produced by income management is then compared to the flows originating from:
– Investments or divestments in the technical, financial and capital assets sector;
– Taking out or repaying medium- and long-term debt;
– Changes in net worth (capital increases or repayments, dividend distributions, financing in
c/future increase etc.).
The sum of all these flows determines the increase or decrease suffered by the initial financial resource.
during the financial year.
The most commonly used methods in practice are essentially two:
1. Cash flow statement – ​​indirect method
2. Cash flow statement – ​​direct method
The fundamental distinction between the two schemes arises from the fact that the second, direct method, is used for
start-ups, while the first is for companies with at least two/three available balance sheets.
Cash Flow Statement – ​​Indirect Method
The direct financial statement can be prepared in two forms in relation to the concept of resources
financial taken as the basis of the same.
The forms are as follows:
– Cash flow statement in terms of net working capital;
– Cash flow statement.
In both cases the financial statement must show:
1. The financial resources generated by the income management of the financial year, i.e. the flow of liquidity or
net working capital generated by the same. This flow is obtained by adjusting the net profit or the
loss of those items that did not generate or require the disbursement of liquidity (or capital)
net working capital);
2. The assumptions and payments of mortgages and bond loans;
3. The proceeds from the sale of technical, financial and intangible assets, to be indicated separately;
4. Purchases of technical, financial, and intangible assets. The three categories must be indicated.
separately. For financial and intangible assets it is necessary to specify the type of
acquired assets (shareholdings, patents, etc.);
5. Dividends paid;
6. The changes that occurred during the financial year in the individual accounts making up the net working capital and the total of
such variations (increase or decrease in net capital);

7. All that series of significant capital variations which do not affect the level of liquidity or of the
working capital whose related monetary variations are excluded from the statement in question (increases in
capital covered by transfer of plants, acquisition of technical fixed assets against release of
bonds, payment of shares through bonds or shares, conversion of bonds
convertible into shares);
8. All other significant changes in the balance sheet, excluding transfers between accounts of the
net worth, which are highlighted in the specific statement.
Compensations between financial flows of opposite sign must in principle be excluded so as not to
alter the significance of the financial statement. These are limited by the general accounting principle.
of the relevance or significance of the data.