Professional Documents
Culture Documents
Nichita Elena Mirela Caig If en Simion Sorin Gabriel
Nichita Elena Mirela Caig If en Simion Sorin Gabriel
Scientific coordinator,
Phd.Senior Lecturer Nichita Elena Mirela
Masterand,
Simion C. Sorin-Gabriel
BUCUREŞTI
2021
INTRODUCTION and RESEARCH METODOLOGY………………………………………………3
CHAPTER I - INTERDEPENDENT RELATIONSHIP BETWEEN FINANCIAL REPORTING
AND FINANCIAL ANALYSIS ..........................................................................................................5
1.1 The position of the financial analysis in relation to the financial-accounting information .....5
1.2 The quality of financial reporting in financial analysis.........................................................7
1.3 Limitations of the information provided by financial statement analysis ............................. 10
1.4 Component Sets of the financial statements ........................................................................ 10
1.5 Theoretical role of financial ratios ..................................................................................... 13
1.6 Literature Review .............................................................................................................. 15
1.7 The role of financial statements ratio in business ............................................................... 16
CHAPTER II – THE USEFULNESS OF FINANCIAL RATIOS IN MEASURING THE
PERFORMANCE OF THE COMPANY ALIX ALUMINIUM ROMÂNIA
S.R.L.......................................................................................................................................................20
2.1 General presentation of ALIX ALUMINIUM ROMÂNIA S.R.L ........................................... 20
2.2 Preparation and presentation of the annual financial statements of ALIX ALUMINIUM
ROMÂNIA S.R.L ........................................................................................................................... 21
2.2.1 The characteristic and the form of the annual financial statements at the company ALIX
ALUMINIUM ROMÂNIA S.R.L. ................................................................................................ 21
2.2.2 Publication of financial statements by the company ALIX ALUMINIUM ROMÂNIA
S.R.L. 26
2.3 Analysis of the financial position of ALIX ALUMINIUM ROMÂNIA S.R.L based on the
balance sheet ................................................................................................................................ 27
2.3.1 Analysis of the evolution of the company's assets ........................................................ 27
2.3.2 Analysis of the company's equity ................................................................................ 29
2.3.3 Company’s asset ratios .............................................................................................. 30
2.3.4 Company’s liability ratios .......................................................................................... 31
2.3.5 Analysis of the patrimonial-financial situation ........................................................... 32
2.3.6 Analysis of the economic-financial balance ................................................................ 34
2.3.7 Financial balance ratios ............................................................................................ 37
2.3.8 Leverage ratios analysis ............................................................................................ 41
2.4 Performance analysis of ALIX ALUMINIUM ROMÂNIA S.R.L on the basis of the profit and
loss account .................................................................................................................................. 43
2.4.1 Analysis of the evolution of the company's turnover .................................................... 43
2.4.2 Analysis of the company's income and expenses ......................................................... 44
2.4.3 Analysis of the financial result of the company ALIX ALUMINIUM ROMÂNIA S.R.L . 46
2.4.4 Profitability ratios...................................................................................................... 50
2.4.5 Analysis of ALIX ALUMINIUM ROMÂNIA S.R.L through the scoring method............ 52
CONCLUSIONS and RECOMANDATIONS .................................................................................. 55
BIBLIOGRAPHY
ANNEXES
INTRODUCTION
Research Methodology
3
This paper is structured in two chapters, which highlight the real data of the
company.
Chapter I- This chapter aims to show the interdependent relationship between
financial reporting and financial analysis and investigate the importance of financial reporting
quality in financial analysis. It highlights the theoretical role of financial ratios and describes
common methods of financial statement analysis. It also shows how the quality of the ratio
analysis could be affected by the limitations of financial statements.
Chapter II- The usefulness of financial ratios in measuring the performance of the
company ALIX ALUMINIUM ROMÂNIA S.R.L describe a matrix that could provide an
estimate of the strength of the entity with the help of financial ratio (leverage, solvency,
turnover,liquidity and profitability) using the numbers from the balance sheets and income
statements, being structured for the years 2017, 2018 and 2019.
It is structured in 2 subchapters, Subchapter 1, which include Analysis of the financial
position of the company ALIX ALUMINIUM ROMÂNIA S.R.L. based on the balance sheet,
refers to the company's liquidity, operational efficiency, short-term financial health, and
evolution of the company's assets and liabilities. The values of fixed and current assets are
also exposed. It is also presented the analysis of the company's equity and the graphs that
show its status and fluctuation in relation with the bank, customers, long-term debts, etc.
Subchapter 2, which include the analysis of the company's performance based on the
profit and loss account, which presents the turnover of financial exercises together with its
structured dynamics. The analysis was performed vertically, according to the information
from the profit and loss account. The revenues with immediate collection and those with
subsequent settlement are also presented. Also, a comparative analysis of the intermediate
management balances is presented to display valuable information regarding the profitability
and efficiency of the company activity on different levels.
4
1 1CHAPTER I - INTERDEPENDENT RELATIONSHIP BETWEEN
FINANCIAL REPORTING AND FINANCIAL ANALYSIS
5
increase (added value);
profitability: gross operating surplus / turnover;
productivity: added value/ fixed assets at gross value;
indebtedness: financial debts / self-financing capitals;
solvency: financial debts / net book value of fixed assets.
Traditionally, the measurement of the entity's performance is done with the help of the
statement of financial position that provides that image that presents in monetary terms, at a
given time, the equilibrium relationship between economic assets and their sources of
financing, own or borrowed. At the balance sheet level, the equilibrium equation being-
ASSETS = LIABILITIES. An economic good can not have a different value from that of the
source that led to its acquisition.
Also, the Profit and Loss Account are by definition a main source of information
for studying the financial performance of the entity.
These accounting images, as a form of representation of the reality in the life of an
entity, are static and are made at the end of a financial year through financial statements that
provide information on the financial position and performance. The recognition of economic
events are always achieved by observing the accounting and fiscal norms and principles.
A large part of the analysis of the financial situation consists of a careful research of
the reported financial statements and a rearrangement, reprocessing of the data so that they
satisfy the needs and objectives of the users. Most financially motivated decisions require a
logical framework in which impressions and conclusions can be systematically developed and
the decision applied. Regardless of the user of the information, whether the person is a
potential investor or a potential creditor, or one of the analyst employees of the corporation
under analysis, the ultimate goal is the same - providing a basis to help make decisions
rationally.
Financial ratios are among the financial statement analysis tool that is widely used in
communicating financial performance of the entities. Interpreting financial ratios, and using
horizontal and vertical analysis, valuable information is reveals its financial strengths and
weaknesses. Considering that the outcomes from financial statements analysis presents
interest for internal and external users and benefit decision-making.
Both internal and external users use the analysis of financial statements in decision
making, but the main purpose of their analysis will differ. The lender of the loan may be more
concerned with the amount of short-term liquidity and the additional value of cash, while the
potential or current shareholder may be more concerned with long-term profitability and
6
capital gains. However, in both cases, it is common to use analysis for decision making.
Another common goal of financial statements analysis is to form a reasonable basis for
predicting the future. Hence, the common concern of specialists to ensure the quality of this
information.
7
The following is a brief description of the elements of fundamental and enhanced
quality mentioned by Kieso et al. (2013).
Kythreotis, (2014) created a quality financial statement based on the standards that
were created by I.A.S.B. To achieve this objective, the basic qualitative characteristics
(relevance and reliability) established by IAS committee were examined based on this
function:
Quality of financial information = f [Quality of IFRS(QIFRS), Quality of national
accounting standard (QGAAP) , Mandatory disclosure (MD), Voluntary disclosure (VD)].
The results revealed that there was an increase in relevance, while reliability
appears to have remained unchanged.
According to Lauzov (1990), the most important objectives focused on influencing the
quality of information in the annual financial statements are those concerning the involvement
of external users and, in particular, of investors and creditors, providing useful information for
making decisions on how the entity is pursuing efficiency and protection of the resources
invested. The quality of information presented in the financial statements can directly
contribute to attract investors, but also to raising the awareness of the business environment
about the opportunities and risks assumed by the decision to invest.
8
At national level, the Order of the Minister of Public Finance no. 1802/2014 amended
and updated, in section 2.3 regulates the main qualitative characteristics of the financial
statements, harmonising them with the provisions of the General Framework of the I.A.S.B
for the elaboration and presentation of the financial statements.
Thus, point 29 of the order states that, in order to be useful, financial information must
be relevant and represent exactly what it intends to represent. The usefulness of financial
information is enhanced if it is comparable, verifiable, timely and intelligible for decision-
making by users, and its benefits of it outweigh its cost. Point 30 of the same order specifies
the Fundamental Qualitative Characteristics which are the relevance and the exact
representation. Comparability, verifiability, timeliness and intelligibility are qualitative
characteristics that amplify the usefulness of relevant and accurately represented information,
being the amplifying qualitative characteristics.
Annual Financial statements should be drawn to present fair information about the
financial position, in a way that helps the user quantify the liquidity of the entity's assets and
liabilities also entity's operating performance and its cash flows position in a manner
comparable and consistent from one period to the next, with the purpose to help external users
and others to understand the financial position of an entity.
Several studies have shown that accounting comparability provides benefits to market
participants. De Franco et al. (2011) suggest that comparability helps analysts to interpret
accounting information, which improves analyst coverage and forecast accuracy, and
decreases the dispersion. De Franco et al. (2011) measure comparability using earnings before
extraordinary items as a proxy for the financial statements.
Kim et al. (2013) find that comparability is positively associated with bond liquidity,
which supports the view that comparabilityhelps market participants to process information
and reduces information asymmetry in the capital market. In sum, comparability will be
beneficial to not only managers, but also financial statement users such as stock investors.
Overall, comparability improves the information environment, which should allow
users to better evaluate firms' historical and current financial performance, and enhance the
ability of financial statement users to understand the implications of an entity's accounting
earnings.
9
1.3 Limitations of the information provided by financial statement analysis
Even if, financial analysis is a powerful mechanism of determining financial strengths
and weaknesses of an entity, considering that is based on the information available in the
financial statements, this suffers from serious inherent limitations of financial statements.
Financial analysis takes into account only the financial aspects, neglecting the aspects
of a non-financial nature so is based upon only monetary information and non-monetary
factors are ignored. Another problem regarding the efficiency of these indicators refers to the
non-integration of investment projects in their calculation. Any investment, which occurs
during a financial year, has a direct impact on the entity's treasury, but is not found as an
expense related to the exercise. Thus, the entity may present large profits, while it may have
real problems with the treasury. When we analyse performance through profit indicators, we
do not take into account the time value of money or, rather, the impact of time on money, we
consider only the financial aspects, neglecting the aspects of a non-financial nature.
Also, accounting concepts and conventions cause a serious limitation to financial
analysis, as the financial statements are prepared on the basis of a going concern, it does not
give exact position, often make financial analysis misleading.
Another serious limitation are changes in accounting polices. The accounting results
can be profoundly influenced by elements, such as: methods for assessing the amount of
stocks released or consumed (L.I.F.O, F.I.F.O, W.A.C), depreciation and amortisation,
mergers and acquisitions. A change in the entity's policy on these components has an effect on
results, but not on cash flows.
Analysis is only a means and not an end in itself. The analyst has to make
interpretation and draw his own conclusions. Different people may interpret the same analysis
in different ways, so personal judgement is another serious limitation.
As long as the entity understands the limitations of the information provided,
financial statement analysis is a good tool to predict growth and entity financial strength.
Many users, have to rely on the financial statements as their major source of financial
information and such financial statements should, therefore, be prepared and presented at least
annually with their needs in view.
The financial statements are the result of a set of specific financial-accounting factors
that attract the responsibility of those charged with governance and which, before being
10
submitted to bodies authorized by the state and subsequently published, are audited and
approved by the competent forums.
The preparation of annual accounts and reports by entities is governed by the use of
generally accepted accounting principles (G.A.A.P), accounting law and financial statement
regulations, by means of certain internationally recognized standards (I.F.R.S). Generally
Accepted Accounting Principles (GAAP) requires an entity to prepare annual financial
statements that comply with the relevant regulations. The annual financial statements, as
summary documents, give a true, fair and complete picture of the financial position and
performance or non-performance achieved by an economic entity.
According to I.A.S 1 Presentation of Financial Statements, a ”complete set of financial
statements”comprises: (a) a statement of financial position as at the end of the period (b) a
statement of profit or loss and other comprehensive income for the period (c) a statement of
changes in equity for the period (d) a statement of cash flows for the period (e) notes,
comprising a summary of significant accounting policies and other explanatory notes, and
(f) if the entity has applied an accounting policy retrospectively, made a retrospective
restatement of items or has reclassified items in its financial statements: a statement of
financial position as at the beginning of the earliest comparative period.
The titles of the individual statements are not mandatory and an entity can, for
example continue to refer to the statement of financial position as ‘balance sheet’ and to the
statement of profit or loss as ‘income statement’.
At national level, the Order of the Minister of Public Finance no. 1802/2014 amended
and updated, in section 2.1 (General provisions) para 16 and para 17, stipulates that the annual
financial statements constitute a unitary whole and the objective of the annual financial
statements is to provide information about the financial position, financial performance and
cash flows of an entity, useful to a wide range of users. Currently, at national level are
recognised two financial reporting frameworks, EU-adopted I.F.R.Ss and Romanian G.A.A.P.
All entities are required to present a set of financial statements, the components of
which differ depending on the size of the entity. There are four sizes of entity to consider
when preparing and filing accounts and reports: microentity, small entity, medium-sized
entity and large entity. It is important to determine the size of entity to ensure that the relevant
regulatory requirements for the preparation and filing of the annual accounts and reports are
applied.
The size of an entity is determined by thresholds for turnover the total of the current
and non-current assets and the average number of employees.
11
Table no.1.1- The Component Set of the financial statements according to the size of an entity
Compliant with
EU Directive Abbreviated Consolidated
SIZE CRITERIA
TAssets: 4.000.000 euro, They do not exceed the TAssets:24.000.000 euro,
Turnover:8.000.000 euro, limits of two of the size Turnover:48.000.000 euro,
Employes: 50 criteria Employes: 250
COMPONENT ELEMENTS
Once published, accounting information becomes a ‘‘fact”
- balance sheet, - balance sheet, - consolidated balance
-profit and loss account, -profit and loss account, sheet;
- statement of changes in - explanatory notes to the - consolidated profit and
equity, simplified annual financial loss account;
- Cash flow statement, statements, - explanatory notes to the
- Explanatory notes. Optional: consolidated financial
- statement of changes in statements.
equity,
- Cash flow statement. under IFRS ‘adopted’ for
application within the EU
The information should be presented for 2 years
(Source- Order of the Minister of Public Finance no. 1802/2014)
Financial ratios are extensively used by practitioners, managers, owners, investors, and
other shareholders to assess the financial performance of a business entity. This analysis is
based on public financial statements, that are the major source of financial information for
these users.
According to Erkki K. Laitinen (2018) - Financial ratios are constructed
mathematically as a ratio of the numerator (e.g., variable income) and denominator (e.g.,
variable equity) taken from income statement or from the statement of financial position.
They are useful ratios of the financial performance of an entity and are often computed
for predictive purposes. However, changes in a particular ratio are difficult to interpret
because, they can be related to changes in the numerator, the denominator, or both. Therefore,
each change needs an interpretation of its own.
In corporate financial analysis, the principal reason to use financial accounting ratios
is to facilitate comparison across years or entities by full control of size. For example, the
changing size of equity over time is controlling by an evaluation of a given entity’s
profitability over time by the return on equity ratio.
The full control of size assumes that the relation between the ratio components x
(numerator) and y (denominator, which is a measure of size) is strictly proportional as x =
b y (y) leading to x/y = b, (Lev & Sunder,1979).
The deviation from the proportionality due to an intercept term and the complexity of
interpreting these categories of time-series changes is the most frequently encountered
13
problem with financial data. However, the interpretation of the time-series change in x/y can
significantly be facilitated if the change in both x and y is known, (Barnes,1987).
If a > 0 and fixed, an increase in x without an increase in y means that b has
increased. Similarly, an increase in y without an increase in x tells that b has decreased.
Even if proportionality is violated, an analysis of the changes in ratio components
can help the practitioner to interpret time-series changes in financial ratios.
The first use of ratio analysis is for prediction purposes to estimate empirical
relationships. Usually, there are the folowing types of use: Forecasting variables of future
profit and loss, using financial ratios by the practioner to predicting, payment delay,
bankruptcy, distress, failure, using financial ratios by researchers as variables in statistical
models. The second use of ratio, a normative one is to compare a ratio of an entity with a
standard, criteria or industry-wide average. This normative analysis can be performed in two
distinct ways. Firstly, the user can perform a trend analysis and time-series analysis with the
goal to examine the ratio over time to identify a trend (for example 5 - 10 years). Secondly,
the user can perform an inter-firm analysis and cross-sectional analysis to compare the value
of the ratio with those of other entities across the same industry.
Pinches et al., (1975) states that Ninety-two percent of the common variation among
the financial ratios was accounted for by these seven classifications which were
descriptively labelled: Return on investment, Capital Turnover, Inventory Turnover,
Financial Leverage, Receivable Turnover, Short-Term Liquidity, and Cash Position. The
labels employed for each classification are intended to represent not necessarily unanimous
but the predominant.
Anghel, (2002) specifies that over 150 financial rates can be identified in the field of
specialised literature. The following table summarizes a set of financial rates, considered
representative of the financial diagnosis (Anghel, 2002).
Inventory Receivables
Return on Financial Asset turnover Short term
Cash-flow turnover turnover
investment Leverage ratio Liquidity
ratio ratio
Net Liabilities/OE Turnover/Assets Current Treasury Inventory/Net Receivables/
profit/Net assets/Current assets/Assets turnover Inventory
asset liabililites
Net profit/ Libilities/Assets Turnover/Fixded Current Treasury COGS/ Receivables/
OE Assets Assets/Current assets/ Inventory Turnover
liabilities Expenses
14
For analysis, in an absence of explicit theory base of the ratios, studies provide just
instructions of how to calculate their structure.
In Time-series analysis, an entity can compares its own performance over a period of
time progressed according to its plans. help with future decision making identify issues that
can be highlighted and resolved
Cross-sectional analysis engages the comparison of different financial ratios that
occured in the same period, through an entity can determine how well has performed in
relation to similar competitors, and as a whole in relation to the industry.
Through the years, studies have constantly demonstrated the usefulness of financial
accounting ratios. Financial ratios are suitable tools in analyzing the entity's financial
statements to assess performance over a period. Moreover, a variety of financial ratios are
existing to analyse the entity's liquidity, activity, debt, profitability and market value.
Delen, Kuzey, & Uyar (2013) used factor analysis to identify fundamental dimensions
of the ratios, followed by predictive modelling methods. They concluded that in predicting
future entity's performance the earnings before tax to equity ratio and net profit margin were
the two most important.
Chenand Shimerda (1981) analysed principal component of 34 financial ratios that
were used in several studies on the prediction of bankruptcy. They found that all ratios were
highly correlated with seven major factors. Their findings indicate that the many financial
ratios predict the same information, so it is suitable to reduce the number of ratios to a more
limited but still representative set.
Pantea et al. (2014) in their study on the determinants on the performance of
Romanian entities, tested the influence of size (turnover) and entity growth (turnover growth
rate), as well as capital intensity (fixed assets / total assets), human resources (total number of
employees) and CSR activity on performance (ROA, ROE).
Some researchers have tested the correlation between the structure of capital and the
performance of entities, the results being different. Thus, Margaritsi and Pisallki (2010) tested
the correlation between shareholder structure, capital structure and entity performance based
on a sample of production entities in France. The results obtained by them support the theory
of agent costs, according to which a higher level of leverage leads to reduced agent costs and
inefficiency and thus to improved performance of entities.
15
A similar correlation is demonstrated by Kazempour and Aghaei (2015), for the case
of entities listed on the Tehran Stock Exchange. On the other hand, Văidean (2014), using
ROA, as a measure of performance, and the total debt / asset ratio, as a factor for the capital
structure, found a negative link between the capital structure and the performance of entities.
The idea of a negative influence between the total debt / asset ratio and performance,
measured in terms of the ROA indicator, is also supported by Banerjee and De (2014), which
means that as this ratio increases, the performance of entities decreases. The explanation is
given by the fact that with the increase of the debt component in the capital structure, the risk
associated with them also increases. Thus, given the fact that entities have to pay a higher
interest rate, due to the increase in debts, the performance of entities decreases.
Also, Chinaemerem and Anthony (2012), using ROA and ROE as dependent
variables, and performance measures, respectively, and the total debt / asset ratio, as an
explanatory variable, tested the impact of capital structure on performance. As control
variables, the authors used indicators such as: asset turnover ratio, entity size (total assets),
entity age, tangibility (fixed assets / total assets) and growth opportunities (relative change in
total assets). Thus, the results attest to the fact that the capital structure is an important
determinant of entities' performance, the correlation being a negative one, which highlights
that due to agent conflicts, entities over-indebtedness, thus leading to decreased performance.
It was also found that the turnover ratio is a strong determinant of performance, having a
positive impact on it. The age and size of the entity are determinants of performance,
measured by ROE. The share of fixed assets was shown to have a negative influence on
performance, measured by ROA, the explanation being given by the fact that the entities
included in the sample were not able to use fixed assets wisely to create a positive influence
on performance. On the other hand, the study did not show that growth opportunities are a
determining factor in the performance of entities.
Instead, Hatem (2014) found that growth opportunities, measured by the “market-to -
book ratio” indicator have a significant positive influence on performance measured by ROA
and ROE, respectively, the explanation being given by the fact that entities with high growth
opportunities invest in projects.
Although in theory, it operates with a large number of financial ratios in practice, each
entity uses a relatively narrow range of ratios, which are usually calculated over well-defined
16
periods, in accordance with the organisation of the information system, which reflects the
better pursuit of its interests, so the ratios used by one entity are not necessarily relevant to
another entity.
The following issues should be evaluated by users in order to obtain an efficient and
complete picture of a business: profitability ratios, liquidity and solvency ratios, asset
efficiency ratios, gearing ratios, and investor (market) ratios.
Below is summarised a time-tested set of financial statements for analyzing a
business. FINANCIAL RATIOS
Figure no.1.2
Source – Performance Management, ACCA)
IMPORTANCE
PROFITABILITY
AND RETURN DEBT AND GEARING LIQUIDITY INVESTOR
INTEREST COVER
ROCE EBIT
PBIT/CE Debt interest DIVIDEND BASED EARNINGS BASED
Z
ROE
PAT-preference dividends DPS
Shareholder funds Dividend for the period EPS
Earnings
No. Of shares in issue
Share in issue
PROFIT MARGINS
Gross profit
INTEREST YIELD
DEBT AND
Revenue
Interest rate
GEARING
or
MV of debt DIVIDEND COVER TSR
Operating profit PAT- DPS+ change in
Revenue preference dividends share price
Dividend payments Share price at start
of the period
DIVIDEND YIELD
DPS
PE RATIO
Share price Share price
EPS
17
According to the theory of the agency (Jensen and Meckling, 1976), managers are
responsible for managing the entity's activity and are directly accountable to shareholders for
its status and performance. For these reasons, managers need to identify the business's
strengths and weaknesses and assess the opportunities and threats that may arise.
The entity's performance can be evaluated using a set of specific accounting
indicators, for which managers propose a set of limit values of ratios, an average range of
variation, and a series of measures to improve performance in case the planned limits are not
reached. The figures found on an entity’s statement of financial position, income statement,
and cash flow statement are used to perform quantitative analysis and assess business’
liquidity, leverage, growth, margins, profitability, rates of return, valuation, activity position
of the entity regarding short-term and long-term perspective. While a single amount such as
net income, obtain from the financial statements can provide significant information, most
analytical techniques involve combining various elements to produce metrics that can be
compared over time.
The analyses rely on a common set of techniques that involves constructing ratios
using multiple financial statement amounts that provides useful information in decision
making from the viewpoint of four dimensions:
Profitability and market performance: (Gross profit margin, Operating
profit margin, Net profit margin, Earnings per share, ROE,ROA);
Liquidity: (Working capital the difference between current assets and current
liabilities, the Current ratio and the Quick ratio or the "acid-test ratio);
Efficiency: (Total asset turnover, Fixed-asset turnover, Inventory turnover,
Collection period);
Capital structure: (Debt/assets, Debt/equity, Long-term debt/equity, Times
interest earned).
Table no 1.4 –Common financial statements ratio with impact on the company’ s
financial performance;
PROFITABILITY and MARKET PERFORMANCE
Measure Formula
Gross profit margin Gross profit on sales/sales
Operating profit margin Operating income/sales
Net profit margin Net income/sales
(Net income - preferred
Earnings per share
dividends)/outstanding common shares
18
PROFITABILITY and MARKET PERFORMANCE
Measure Formula
Dividends per share Dividends/outstanding shares of stock
Dividend yield Dividends per share/beginning stock price
Price-earnings ratio Price of common stock/earnings per share
Dividend payout ratio Dividends/(net income - preferred dividends)
Return on assets Net income/ total assets
Return on equity Net income/equity
LIQUIDITY
Measure Formula
Working capital Current assets - current liabilities
Current ratio Current assets/current liabilities
Quick ratio (Current assets - inventory)/current liabilities
EFFICENCY
Measure Formula
Total asset turnover Sales/average total assets
Inventory turnover Cost of goods sold/ inventory
Collection period Average receivables/(sales/365)
Fixed-asset turnover Sales/fixed assets
CAPITAL STRUCTURE
Measure Formula
Times interest earned Operating income/interest expense
Equity multiplier total assets / equity
Also, we mention DuPont analysis, which decomposes the Return on Equity into
three factors, focussing on the factors that determine profitability:
ROE = net profit margin (net income/sales) x asset turnover (sales/assets) x equity
multiplier (assets/equity)
The quality of the ratio analysis could be affected by the limitations of financial
statements. This does not indicate or identifies any future trends and future prospective
considering information is based on past financial statements, which is only useful for Inter-
firm comparison with other competitors of the same size, same age, and type.
Ratios are not current and provide only quantitative information and not qualitative
information about the entity and do not measure the human element.
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2 CHAPTER II – THE USEFULNESS OF FINANCIAL RATIOS IN
MEASURING THE PERFORMANCE OF THE COMPANY ALIX
ALUMINIUM ROMÂNIA S.R.L
1
Law no. 31 of 16 November 1990 - Law on companies republished in Official Gazette of Romania no 1066 of
17 November 2004,subsequently amended and supplemented;
20
The subscribed share capital is 1,000 lei, divided into 10 shares with a nominal value
of 100 lei each, wholly owned by the sole shareholder, which has a contribution of 100% of
the share capital to both profits and losses. The share capital is paid in full.
The main field of activity of the company consists in the wholesale trade of metals and
metal ores (wholesale of metal ores, ferrous and non-ferrous metals, in primary form,
wholesale of semi-finished products of ferrous and non-ferrous metals, aluminum accessories,
profiles aluminum for glass walls, doors and windows, PVC strips, hardware, plastic fastening
systems, or synthetic materials, PVC or plastic, butyl).
2.2.1 The characteristic and the form of the annual financial statements at the
company ALIX ALUMINIUM ROMÂNIA S.R.L.
The company ALIX ALUMINIUM ROMÂNIA S.R.L has the obligation to prepare
the annual financial statements, as stated in “art. 28 para. (1) ”of the“ Accounting Law no.
82/1991 ”in the format provided by the“ Romanian accounting framework ”which transposes
the provisions of“ Directive 2013/34 / EU 3”, accounting directive.
2
Order Nr. 1802 of December 29, 2014 - Part I for the approval of the Accounting Regulations on the individual
annual financial statements and consolidated annual financial statements, Published in: Official Gazette no. 963
of December 30, 2014;
3
Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial
statements, consolidated financial statements and related reports of certain types of undertakings, amending
Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives
78/660/EEC and 83/349/EEC ,published in Official Journal of the European Union L 182/19/29 June 2103.
21
Analysing the data from the company's accounting on 31.12.2019 and the size criteria
"provided in point 9 of the accounting regulations in force" registered on December 31, 2018
by ALIX SYSTEM ROMANIA SRL, we conclude that it falls into the category of small
entities because, “Does not exceed the limits of at least two of the following three criteria:
total assets: 17,500,000 lei; net turnover: 35,000,000 lei; average number of employees during
the financial year: 50.
The indicators according to which the size criteria were established are:
“total assets” - (This indicator includes: fixed assets, current assets and prepaid
expenses)
Year 2018 - 1.126.289 lei Year 2019 - 2.502.829 lei
Taking into account these aspects, at the end of the financial year 2019, the entity
prepared annual financial statements specific to small entities, provided in “pt. 20 para.
2 of the accounting regulations ”in compliance with the provisions regarding the closing of
the financial year 2019 regulated by the Order of the Minister of Public Finance no.
3781/2019 ”, which include:
“abbreviated balance sheet” as provided for in “paragraph 451” and “paragraph 599”
of the O.M.F.P. no. 1.802 / 2014”;
“Profit and loss account”, as provided in “point 428” and “point 600” of the O.M.F.P.
no. 1.802 / 2014 ”;
"Explanatory notes to the annual financial statements", which were presented
systematically in the order in which the items of the nature of assets, liabilities and
capital and items of income and expense were recognized in the income statement.
"Informative data", according to the structure provided in "point 7" of Annex no. 4 of
“O.M.F.P no. 3781/20194”;
4
Order no. 3781/2019 on the main aspects related to the preparation and submission of annual financial
statements and annual accounting reports of economic operators to the territorial units of the Ministry of Public
22
"Statement of fixed assets" as provided for in "point 8" of Annex no. 4 of “O.M.FP no.
3781/2019”;
The company ALIX ALUMINIUM ROMÂNIA S.R.L did not prepare the statement
of changes in equity and the statement of cash flows. They are prepared for information
purposes only for the management of the parent company through a “summary annual report”,
which is not published.
According to the “accounting law 82/1991 5 ” for the preparation of the financial
statements of ALIX ALUMINIUM ROMÂNIA S.R.L, accounting policies were applied
according to the applicable regulations in force. The financial statements are prepared
according to the model based on the recoverable historical cost and the concept of
maintaining nominal financial capital and provide a true and fair view of the financial
position, financial performance and other information relating to the activity carried out.
The principle relationship by which the financial position of ALIX ALUMINIUM
ROMÂNIA S.R.L was evaluated is of the form: the net situation (equity) = the assets of the
patrimony - the debts.
The balance sheet of ALIX SYSTEM ROMÂNIA SRL is a vertical balance sheet (in
the form of a list) and allows the calculation of the net current assets indicator, which is
nothing but “NFR - working capital requirement” or as mentioned in the literature “working
capital and which puts Qwners's equity. We conclude that it has a standardized format,
highlighting the fact that, in case of liquidation of a company, third party creditors have a
legal priority over the owners.
For ALIX SYSTEM ROMÂNIA SRL in 2019, the Qwners’s equity are positive, in
the amount of 522,944 lei, increasing compared to 2018, when they were worth 254.898 lei,
respectively increasing compared to 2017 when they were worth of 148,954 lei.
The items are presented based on liquidity criteria.
Finance and for the regulation of accounting issues, Text published in the Official Gazette, Part I no. 5 of
January 7, 2020.
5
Republished Accounting Law no 82/1991 in The Official Journal no. 20 of 20 January 2000 *) ,Republished in
conformity with Article II of the Government Ordinance no. 22/1996 on updating and complementing the
general accounting status, with a new numbering of texts.
23
Liabilities ≤ 1AN 156.591 lei
Liabilities >1AN 1.823.294 lei
TOTAL LIABILITIES 1.979.885 lei
Formula:
Qwners’s equity = Assets - Liabilities
= 2.502.829 - 1.979.885 = 522.944 lei
Thus, according to the fundamental accounting equation, we have the following values
for the analyzed company:
Assets = Qwners’s equity + Liabilities
2.502.829 lei = 522.944 lei + 1.979.885 lei
The structure of the patrimonial balance sheets prepared by the company ALIX
ALUMINIUM ROMÂNIA S.R.L. for the years 2017 and 2018 and 2019, respectively, it is
presented in the Annexes to this study.
The evaluation of the financial performance of ALIX ALUMINIUM ROMÂNIA
S.R.L Company is reflected in the profit and loss account by reporting the income and
expenses of a financial year.
The company recognized revenue “simultaneously with the recognition of the
increase in assets or a reduction in liabilities” and the expenses were recognized
“simultaneously with the recognition of the increase in the value of debt or the decrease in the
value of assets”.
The profit and loss account is presented in the form of a list or vertical diagram that
describes the formation of the result in steps, and groups the expenses and income
according to their nature. The economic-financial operations are grouped in activities that
can be main or operating, being considered current operations and generate the current
result and the financial activity.
The profit and loss account, as a summary document, highlights certain specific
indicators.
"Net turnover" is the indicator that refers to the activity carried out by the company,
"after deducting commercial discounts and value added tax and other taxes directly
related to turnover" is in the amount of 4.232.315 lei, increasing compared to 2018 when it
was in the amount of 2.225. 408 lei.
24
“Operating result” - expresses the profitability of the operating activity, independent
of the financial and fiscal policy, taking into account, however, the depreciation and
provisioning policy. The company ALIX ALUMINIUM ROMÂNIA S.R.L registers an
increase in absolute values of the operating result: in 2018 compared to 2017 - with the
amount of 150.193 lei (268.272 lei - 118.079 lei), and a decrease in 2019 compared to 2018
with the amount of -17.853 lei (250.419 lei -268272 lei).
"Financial result" = Financial revenues - Financial expenses
For ALIX ALUMINIUM ROMÂNIA S.R.L in financial year 2019 we have: 78,410
lei - 27,922 lei = 50,488 lei.
The “current result” takes into account both the operating and the financial result. If
in 2017 - 2018 the influence of the financial result determined a decrease of the current result,
in 2019 the financial result had as influence the increase of the current result with the amount
of 50.488 lei.
This was determined by the company's realization of financial revenues from
discounts obtained from suppliers for the large volume of sales of some varieties of goods.
“Gross profit for the year” is the profit made by the company before tax. In the case
of our company, this indicator has grown steadily. In 2018 compared to 2017, the gross result
increased in absolute value by 142.860 lei (253.734 lei-110.874 lei), and in 2019 compared to
2017, a higher net result with the amount of 190.033 lei (300.907 lei- 110.874 lei).
“Net result for the year” expresses the absolute amount of financial profitability with
which shareholders will be remunerated for the subscribed equity.
In 2018 the company registered a net result with 120.183 lei (213.317 lei - 93.134
lei) higher than in 2017, and in 2019 a net result, higher than in 2017 with the amount of
159.628 lei (252.762 lei - 93.134 lei ).
It should be noted that, at group level, the consolidated operating result (consolidated
E.B.I.T) and also the total consolidated assets are used.
Consolidated operating result = Operating result of the parent company + Operating
result of the consolidated companies by the method of global and / or proportional integration.
The structure of the profit and loss accounts, prepared by the company ALIX
ALUMINIUM ROMÂNIA S.R.L. for the years 2017 and 2018 and 2019, respectively, it is
presented in the Annexes to this study and aims to calculate the time variation of total
revenues and total expenditures, but also by types of activities, respectively operating activity
and financial activity.
25
We conclude that the financial information of the company ALIX ALUMINIUM
ROMÂNIA S.R.L in order to be usefu are relevant and represent exactly what they aim to
represent. They are comparable, verifiable, timely and intelligible with the fundamental
qualitative characteristics of "relevance and accurate representation."
The annual financial statements of ALIX ALUMINIUM ROMÂNIA S.R.L. are
drawn up on the basis of the "going concern principle".
26
reprocessing of the comparative information nor its presentation as if the error had not
occurred.
Although in the year of its establishment the company operated in a rented space, during
the activity it acquired with its own resources as well as attracted (long-term bank loans), a
number of five commercial spaces. Currently, the company operates in its own commercial
spaces.
The situation of the fixed assets held by the company during 2017 - 2019, according to
the data presented in the concluded annual balance sheets, is the following:
2017 294.788
2018 282.374
2019 722.754
Also, the company owns the related land on which the central warehouse is built, having
on 31.12.2019 a total value of 36.330 lei (included in the value of non-current assets).
For the supply of goods, the company purchased a number of 2 cars, with a total value
of 50.422 lei, of which one car purchased in 2017 and the second purchased in 2018.
The means of transport were financed both from their own sources and attracted,
through financing in a financial leasing system, with an internal financier. A good
development of the activity was ensured by the acquisition in the last 3 years of 10 high-
27
performance computers that allowed the realization of the quantitative-value record of the
stocks of goods.
The company is equipped with furniture suitable for storing, shipping and selling
goods, an investment made with its own sources which, on 31.12.2019, has a value of 20.523
lei.
Current assets
The company has current assets in the total amount of 1.780.075 lei on 31.12.2019,
consisting of 720.257 lei in stock, receivables of 1.009.281 lei, available at the cashier's
office and bank accounts in the amount of 50.537 lei.
The evolution of current assets in the last three years of operation has registered a
constant growth, which has been determined by the increase in turnover.
The permanent development of the company's activity was the result of the
investments made, both in fixed assets (commercial spaces) and in current assets.
Analyzing in dynamics the evolution of current assets, we find the following situation:
Evolution in dynamics of current assets Table no: 2.2.- lei –
Indicators 2017 2018 2019
Total current assets 616.256 843.915 1.780.075
Of which:
- inventories 338.343 582.338 720.257
- receivables 128.846 157.146 1.009.281
- cash in bank 149.067 104.435 50.537
Comparing the presented data, it results that the stocks of goods registered a permanent
increase as a result of the expansion of the company's activity by opening new working
points, thus reaching a doubling of the activity volume in 2019 compared to 2017.
28
The average number of rotations of the stock is increasing during the analyzed period,
which means that the company can afford to do more operations without increasing its assets.
As it appears from the data analyzed in the table above, it is estimated that the average
receivables is alarming in 2019 compared to 2018-2017, a totally unfavorable situation for the
company and confirming that the balance of uncollected receivables is high.
The company has registered in the last three years a positive and growing net owners’s
equity which reflects a sound economic management, which marks the major objective of
financial management: maximizing equity and net assets financed from these capitals.
Therefore, the company is solvent because the existing net asset allows it to pay all debts.
Thus, we appreciate that the company operates on the basis of the "going concern
principle" continuing its normal operation in the coming years without a significant reduction
in activity and without entering into a state of reorganization or liquidation.
29
2.3.3 Company’s asset ratios
The rates of the assets reflect the sectoral affiliation of the company and are in
accordance with the nature of its activity.
Fixed assets ratio – measures the degree of investment of fixed capital. During the
analyzed period, there is an increase in 2019 compared to 2018 by 3.01% due to the
acquisition of property, plant and equipment.
Tangible fixed assets ratio – updated during the three years, shows that investments in
tangible fixed assets have a high share, which provides economic stability in case of an
economic crisis and does not involve the risk of their transformation into liquidity.
Current assets ratio – expresses the share in the total assets of working capital, so we sill
have:
2018 compared to 2017 – As a result of the significant increase in the share of
inventories, there is an increase of 7.9 percent.
2019 compared to 2018 – There is an appreciable decrease of 22.92% mainly
due to the increase in receivables, a negative fact that led to a considerable
decrease in cash.
Treasury assets ratio – it is influenced by the average receivables collection period and
the average payables period. If in 2017-2018 the level of the rate was above the optimal
threshold of 3-5%, in 2019 it is obvious that the decrease below this threshold is an
unfavorable situation for the company.
30
2.3.4 Company’s liability ratios
Liabilities rate-structure allow the appreciation of the company’s financial policy by
highlighting some aspects regarding the stablishment and financial autonomy.
Financial stability ratio (Solvency) – reflect the connection between the permanent
capital that the company has and the total patrimony. The rate level in the analyzed period
did not reach the optimal level of 2/3, finding a constant decrease.
Global financial autonomy rate shows the degree of independence of society. Compared
to the optimal value of this indicator, of 1/3, the company reached the highest level in 2018
Global Leverage Ratio show the share of all debts that the company has in its total
liabilities. Compared to the optimal value of this indicator below 2/3, it is estimated that
the company constantly exceeds in the three years analyzed the value of this indicator,
which is not advantageous to the company.
Long Term Leverage Ratio shows the degree of indebtedness through long and medium
term loans. For the analyzed period, this indicator has a significant decrease in 2019
compared to 2017.
It is found that in 2019 the trade payables turnover rate increased by 9.41 compared to
2018 and by 9.14 compared to 2017, which indicates that the company’s liquidity is low.The
variables are summarize in table, below:
31
Calculation of the turnover rate of trade payables Table no: 2.8 -%-
Base of calculation
Analysis
ATr = CA-I
Acid test ratio 0,5 0,3 0,6
CL
Cashflow liquidity CFLr = (C +
0,25 0,13 0,03
ratio MS+CFO)/CL
32
Figure no.2.1
1.2
0.8
0.6
0.4
0.2
0
Current Ratio Acid test ratio Cashflow liquidity
ratio
2017 1.03 0.25 0.5
2018 1.05 0.13 0.3
2019 0.98 0.03 0.6
Current ratio compares all current assets with all short-term debt. In the period
2017 - 2018, the current ratio was superunitary, so the company's financial
situation was acceptable compared to 2019 when a subunit value is registered,
which expresses the fact that the company does not have the capacity to pay its
short-term debts. A rate between 2 and 2.5 is considered optimal.
Quick ratio (acid test) expresses the company's ability to meet its short-term
debts from receivables and cash. The situation resulting from the dynamic
analysis of this rate expresses the low capacity of the company to pay its short-
term debts from receivables and cash, stocks being usually less liquid than the rest
of the components of current assets. The optimal value of this rate is usually
between values of 0.8 and 1.
Cashflow liquidity ratio assesses the extent to which payables can be covered by
cash. The resulting values show a worrying decrease in the company's ability to
repay short-term debts from cash, due to the non-collection of receivables on
time. If in 2017 the level of the rate approached the optimal level of 0.3, during
2018-2019 it experienced a drastic decrease.
33
2.3.6 Analysis of the economic-financial balance
In order to achieve a higher degree of detail regarding the company's assets and
liabilities, the components of the balance sheets were treated, respectively a regrouping,
which leads to the establishment of financial statements for 2017-2019, as presented below.
Fixed Assets 294.788 282.374 722.754 Permanent Capitals 315.142 324.491 679.535
The first part of the financial statements reflects the long-term financial balance, and
the second part of the financial statements reflects the short-term financial balance.
The assessment of the financial balance is made through the balance indicators:
Working capital (Long term equilibrium)
Working capital requirement (Short term equilibrium)
Net treasury or Net cash (Current equilibrium)
Net working Capital (permanent- Long term equilibrium) Table no: 2.11 -lei-
34
Years Deviations (±Δ ) Indices (%)
Nr. Indicators
(lei) 2017 2018 2019 2018/2017 2019/2018 2018/2017 2017/2018
crt.
Permaenent
2 294.788 282.374 722.754 -12.414 440.380 95,79 255,96
needs
Net working
3 capital 20.354 42.117 -43.219 21.763 -85.336 7,18 -46,54
(1-2)
From the analysis of the indicator thus calculated we distinguish two situations: in 2017
and 2019 the company registered a working capital with positive values, which indicates that
the permanent equity financed a part of the current assets, after the full financing of the net
fixed assets.
In this situation, there is a long-term balance and a contribution to achieving short-term
financial balance.
In 2019, the permanent working capital registered a negative value, which reflects the
absorption of a part of the temporary resources for financing permanent needs, a financial
imbalance determined by the non-collection of the company's receivables on time.
2 Net fixed assets 294.788 282.374 722.754 -12.414 440.380 95,79 255,96
Own working
3 capital -145.834 -27.476 -199.810 118.358 -172.334 75,34 -50,80
(1-2)
Analyzing the obtained results, it is estimated that in 2017, 2018 and 2019 the company
registers a negative working capital, which means that the assets are only partially financed
from own sources, the company having to resort to borrowing to finance part of its fixed
assets.
35
Working Capital Requirments (Short term equilibrium) Table no: 2.13
Nr. Indicators Years Deviations (±Δ ) Indices (%)
crt (lei) 2017 2018 2019 2018/2017 2019/2018 2018/2017 2019/2018
1 Temporary needs
467.189 739.480 1.729.538
272.291 990.058 152,28 233,89
The most relevant indicator of short-term financial balance is the "Requirment for
working capital", which represents the need to finance the current assets required in the
company's business. This indicator must be constantly analyzed with the working capital and
is related to the gap between payments and receipts. The need for woking capital appears in
the balance sheet as the difference between current (current) assets and current liabilities. As
current assets are continuously renewed, it turns out that the "Requirment for working capital"
itself is permanent.
It is observed during the analyzed period that the company has lower temporary needs
than the possible temporary sources to be mobilized as the Need for working capitals is
negative in all the three years analyzed.
Net cash represents the surplus of working capital compared to the Need for working
capital, being the most conclusive expression of an efficient activity. The registration of
apositive cash in several successive financial years, demonstrates the success of the company
in the economic life and the possibility of the profitable placement of the cash availabilities
for the strengthening of the position on the market.
The company registered in the three years subject to analysis a positive net cash, which
means that the financing surplus is found in the form of cash.
36
The variation of the net cash - represents a result of the self-financing capacity, being
known the fact that in the French system, the variation of the net cash gives the cash flow.
The variation of the negative net cash in the successive increase registered in 2018 and
2019, respectively, does not lead to the achievement of a financial balance. In the dynamics
generating an unfavorable situation for the company by diminishing the real capacity to
finance the company's investments.
2018 1,15
0.94 1.07 2017
2019 0,94
2018
2019
1.15
Also called the rate of financing of fixed assets that expresses the company's ability to
finance its investments and current assets, being the ratio between permanent capital and net
fixed assets.
It is found that in 2017 and 2018 the company registered a positive net working capital,
so it can fully finance both its investments and current assets.
In 2019, however, the company recorded a negative net working capital, which means
that it cannot finance its investments from stable resources.
Investment self-financing ratio – It measures the company's ability to finance its own
investments.
SFR2018/2017 = 1.76
SFR2019/2018 = -0.65
37
Figure no. 2.3
SFR
1.76
2
1.5
1 SFR
0.5
0
-0.5 2018/2017 2019/2018
-0.65
-1
If in the period 2017-2018 the company had sufficient self-financing capacity, in the
period 2018-2019 it is estimated that the company is unable to finance the new investments on
its own, which led to the contracting of a new bank loan.
Based on the data presented in the company's balance sheets and financial statements,
concluded for the period 2017 - 2019 and the indicators on the analysis of financial balance,
as previously calculated, the table "Uses - Resources" and the Cash flow as presented in
annexes to this study, resulting in the following:
III. Change in net treasury –Change in current equilibrium (net cash I-II):
38
The correlations established by the “Uses - Resources” table can be verified by
comparing the values obtained in the table below for ΔNWC, ΔNWCR, and ΔNC with those
calculated based on the annual balance sheets.
Analyzing the indicators resulting from the table, it is found that in 2018 and 2019 the
company recorded negative cash flows, due to the volume of inventories, especially in 2018,
as well as the increase in the volume of receivables in 2019.
39
Urgent measures are thus required to reduce the commercial credit granted to customers,
to reduce the contractual terms of recovery of receivables from customers, in order to obtain a
positive cash flow.
From the analysis of the Cash Flow presented in table below it is observed that the
company ALIX ALUMINIUM ROMÂNIA S.R.L., registered positive cash flows from the
operating activity both in 2018 and in 2019.
CF = ΔTN = CF operating + CFinvestment + CFfinancing .
From 2019, the company registered a very high negative flow from the investment
activity, which was determined by the investment in new commercial spaces. Given that the
purchased commercial space has come into operation, it is expected an increase in the
company's revenues and obtaining a substantially higher positive cash flow from operating
activity, which would lead to a change in net cash to positive values.
40
In 2018, although the company did not make investments, it was in the situation of
repaying the loan contracted in previous years, a loan that had as objective another
commercial space. Given the large volume of credit committed, as well as the relatively short
term (3 years) of repayment, we can appreciate that the effect of the investment made in 2017
was not major on the change in net cash.
It is to be appreciated the company's orientation towards the permanent expansion of the
activity, which also determined the spectacular increase of the turnover by 222.8% and of the
net profit to be distributed by 272.8%. Equally important is the aspect regarding the constant
effort of the company, which has in view the assurance of a varied assortment of goods in
order to satisfy the market demand.
Indicators Years
Nr.crt.
(lei) 2017 2018 2019
762.090 871.391 1.979.885
1 Total Liabilities
911.044 1.126.289 2.502.829
2 Total Assets
Leverage 0,84 0,77 0,79
3
(1/2)
148.954 254.898 522.944
4 Equity
911.044 1.126.289 2.502.829
5 Total Assets
0,16 0,23 0,21
6 Equity ratio (4/5)
Debt Ratio 0,84 0,77 0,79
7
(1-Equity ratio)
6
Nichita, M.E. and Vulpoi, M. (2016), Relationship between risk and transparency in the financial statements of
professional services entities, Audit Financiar, vol. XIV, no. 5(137)/2016, pp. 540-550, DOI:
10.20869/AUDITF/2016/137/540;
(Permanent link to this document: http://dx.doi.org/10.20869/AUDITF/2016/137/540)
41
A debt ratio less than 100% indicates that the company has more assets than debts
but its debt ratio is higher than its equity ratio. It means that the entity uses more of debt to
fuel its funding. In other words, it leverages on outside sources of financing.
A company that has a debt ratio of more than 50% is known as a "leveraged" company
so ALIX ALUMINIUM ROMÂNIA S.R.L is a leveraged company.
Equity/Long term
Debt to capacity ratio 0,9 4,10 3,3
liabilities
Debt-to-equity ratio - expresses the total debt (short, medium and long term) of the
company in relation to equity. This rate indicates the degree to which the company's capital
has secured the company's financing. In the case of the company ALIX ALUMINIUM
ROMÂNIA S.R.L., a decreasing rate is observed for the period 2018 - 2019 compared to
2017.
Financial debts ratio - there is a decreasing degree of long-term indebtedness in 2018
compared to 2017, explained by the fact that the company has not committed long-term loans
to finance investments. In 2019, as a result of contracting a long-term loan, this indicator
increased significantly compared to 2018. The increase in indebtedness was mitigated by the
increase in equity in 2019 due to reserves resulting from the revaluation of property, plant and
equipment.
Financial expenses coverage ratio – considering the fact that it registers in 2019, values
below 0.6, it results that the company has an increasing capacity to pay the cost of
indebtedness and does not risk a possible state of bankruptcy.
Debt to capacity ratio from the point of view of the capacity to contract loans, it is
observed that the company has a high availability in 2018 and 2019, the debt to capacity ratio
being superunitary.
42
Conclusions
Comparing the presented data, we conclude that it is necessary to increase the
company's availability and create a positive working capital that can allow full financing of
investments from stable resources, as well as financing current assets. In order to restore the
financial balance, the company will have to improve the acid test ratio by focusing the
company mainly on sales with immediate settlement to the detriment of sales on credit.
Period Turnover
2017 100%
2017/2018 117,16%
2018/2019 222,81%
43
Figure no. 2.4
222.81
250
200
117.16
150 100 2017
2018
100 2019
50
0
2017 2018 2019
120
90.2
100
84.1
80
55.1
60 sales with immediate
collection
40
20
0
2017 2018 2019
44
Figure no. 2.6
120
100
80
60 44.9
0
2017 2018 2019
200
0
2018/2017 2019/2018
45
2.4.3 Analysis of the financial result of the company ALIX ALUMINIUM
ROMÂNIA S.R.L
The structure of information on the company's activity in the "profit and loss" account, on
the three stages (operation, financial and extraordinary) allows the calculation of value
indicators that characterize the economic behavior of the company, known as intermediate
management balances and highlight the ability to self-financing.
Intermediate management balances are presented in the form of margins that highlight
the stages of formation of the result of the year in accordance with the income and
expenditure structures related to the company's activity. Each interim balance reflecting the
result of financial management at the respective stage of accumulation.
Analysis of the results of the company ALIX ALUMINIUM ROMÂNIA S.R.L was
made vertically based on the information from the profit and loss account for 2017, 2018 and
2019. The construction of indicators was done in cascade starting from the most
comprehensive elements respectively: production for the year, profit margin, value added, and
ending with the most synthetic: the current result and the net result of the exercise.
The advantage of the table of intermediate management balances consists in the fact that
it highlights the calculation of the result on each stage of its formation.
The indicators presented in the table of intermediate management balances highlight the
stages of formation of the result of the exercise, in accordance with the structures of incomes
and expenses of the company.
Figure no. 2.8
46
The table of intermediate management balances - ALIX ALUMINIUM ROMÂNIA S.R.L.
47
b) The production of the exercise in the case of the company ALIX ALUMINIUM
ROMÂNIA S.R.L represents the income realized from the rent of a part of the surplus
commercial space. These revenues have been realized since July 2017. The “production for
the year” indicator registers a constant increase every financial year, following the increase of
the EURO exchange rate - reference currency for establishing the tariff negotiated by the
contract concluded between the parties.
c) Added value - registered increases in 2018 by 148,894 lei (444.586 lei - 295.692
lei) compared to 2017, and in 2019 by 213,222 lei (508.914 lei – 295.692 lei) compared to the
same year. It represents the increase in value resulting from the use of production factors,
especially labor factors, being a source of accumulations.
d) Gross operating surplus highlights the financial performances of the company
ALIX ALUMINIUM ROMÂNIA S.R.L., generated by the operating operations, independent
of the amortization system adopted by the financial and fiscal policy. It is the first indicator of
intermediate management balances with significance in terms of profitability.
From the presentation made above, it can be seen that the table of intermediate
management balances is an important tool that characterizes the company's performance and
the impact of trade, production and depreciation policy, as well as financing, debt and fiscal
policies on the result.
Self-financing capacity (SFC) - is the indicator that reflects the financial potential
determined by the company's profitable activity at the end of a period, intended to remunerate
equity (through dividends) and to finance future development (through the part of profit
destined to own sources and reserve fund ) as well as the maintenance or renewal of fixed
assets (through depreciation).
The self-financing capacity represents the global net monetary surplus that is formed
as a difference between the table of receipts and payments made by a company in a period of
time and in correlation with the fiscal incidence.
SFC is determined by two methods: the deductive method and the additional
method.
48
Table no.2.23 - lei -
49
From the analysis of the presented data it results that the company registers a constant
increase of the self-financing capacity, and consequently the capacity of the company to
finance itself from its own sources increases, so the degree of financial autonomy increases.
The company has available the amount of 231.106 lei to self finance its activities
without additional financing costs,respectively the amount of 274.134 lei.
This increase is due, first of all, to the faster acceleration of the revenue index
compared to the expenditure index (see table no 2.21 and figure 2.7).
DuPont analysis - decomposes ROE into three factors = net profit margin (net income/sales) x
asset turnover (sales/assets) x equity multiplier (assets/equity)
50
The DuPont analysis determines quickly the major factors responsible for the decline.
It can be easily seen that the equity multiplier decline over the three years. Thus, capital
structure components are not responsible for the decline in R.O.E. However, both the profit
margin and asset turnover have decreased over time. Management should reduce operating
expenses while maintaining other factors constant
48.34
15.33
48.34
2019
Return on Assets
Commercial rate of return
83.62
23.43
83.62
Return on Equity
2018
62.25
19.43
62.25
2017
2017
2018
2019
Return on Assets expresses the efficiency with which the company uses its potential.
From the analysis of the obtained values it is estimated that the indicator registered an
51
increase in 2018 and a regression in 2019 compared to the previous year, an increase
determined by the negative action of some factors such as: total asset turnover, commercial
profitability rate.
Commercial rate of return: This ratio system characterizes the efficiency of the
commercial policy and the pricing policy practiced by the company. The fluctuation of the
value of the commercial rate of return in 2019 and 2018 compared to 2017 is the result of the
influence of the average markup as well as the level of operating expenses.
Commercial margin rate: The analysis of the commercial margin rate compared to
the three years shows that in relation to the turnover, the commercial margin rate registered an
increase of 3.94 percent in 2018 compared to 2017, and in 2019 it registered a decrease of
4.07 percent compared to from 2017. The decrease is justified by the company's orientation
towards a higher volume of sales and the practice of a lower percentage of the markup,
determined by the sale with preponderance of some sorts of goods with prices imposed by
distributors.
Gross operating margin rate or EBE rate : measures the level of gross operating
income independent of financial policy, investment policy or the degree of taxation
established by law. During the analyzed period, although the turnover is increasing, it is
estimated that in 2018 the rate increases by 4.75%, compared to 2017, and in 2019 compared
to 2017, it decreases by 1.6%.
Net margin ratio : highlights the company’s ability to make a profit and fase
competition. There is an increase in the net margin rate in 2019 compare to 2017.
Gross margin of self-financing: shows the surplus of the company’s resources
necessary for the development and remuneration of shareholders. It is estimated the increase
of the rate in 2019 compared to 2017, following the increase of the gross result of the
company, after deducting the operating expenses.
Return on equity measures the return on the use of equity. The analysis shows an
essential increase in 2018 compared to 2017 determined by the aggressive increase in net
income compared to equity and a decrease in 2019 compared to 2018, motivated by the
increase in equity.
52
As a result of the applications of this method, a “Z” score is obtained. For the analysis
of the bankruptcy risk in the case of ALIX ALUMINIUM ROMÂNIA S.R.L, we used the
Conan and Holder model7, a model that has the following function:
Z = 16 * X1 + 22 * X2 – 87 * X3 – 10 * X4 + 24 * X5
Calculation of indicators for the Conan and Holder method at ALIX ALUMINIUM
ROMÂNIA S.R.L, for 2019 Table no. 2.27
Contribution to
Share
the formation of
Ratio Formula Value coefficient
scores
1.823.294 + 16 9.28
liabilities
X2. Financial stability Equity/Total liabilities 522,944 = 0.21 5.94
Rate (Solvency) 2.502.829 + 22
7
Helfert, Eric A. (2001), Financial analysis tools and techniques: a guide for managers, 10th ed., New York,
McGraw- Hill.
53
Z = 16 * 0.58 + 22 * 0.21 - 87 * 0.0066 – 10 * 0.454 + 24 * 0.534 = 21,60
( = 9,28+4,62- 0,5742- 4,54 + 12,816 =21,60 )
Figure no.2.11
23
22.9
22.8
22.7
22.6
22.5
22.4
22.3
22.2
22.1
22
21.9
21.8
21.7
21.6
21.5
21.4
21.3
21.2
21.1
21
20.9
20.8
20.7
20.6
20.5
20.4
20.3
20.2
20.1
20
19.9
19.8
19.7
19.6
19.5
19.4
19.3
19.2
19.1
19
18.9
18.8
18.7
18.6
18.5
18.4
18.3
18.2
18.1
18
17.9
17.8
17.7
17.6
17.5
17.4
17.3
17.2
17.1
17
16.9
16.8
16.7
16.6
16.5
16.4
16.3
16.2
16.1
16
15.9
15.8
15.7
15.6
15.5
15.4
15.3
15.2
15.1
15
14.9
14.8
14.7
14.6
14.5 21,60 Scor
14.4
14.3
14.2
14.1
14
13.9
13.8
13.7
13.6
13.5
13.4
13.3
13.2
13.1
13
12.9
12.8
12.7
12.6
12.5
12.4
12.3
12.2
12.1
12
11.9
11.8
11.7
11.6
11.5
11.4
11.3
11.2
11.1
11
10.9
10.8
10.7
10.6
10.5
10.4
10.3
10.2
10.1
10
9.9
9.8
9.7
9.6
9.5
9.4
9.3
9.2
9.1
9
8.9
8.8
8.7
8.6
8.5
8.4
8.3
8.2
8.1
8
7.9
7.8
7.7
7.6
7.5
7.4
7.3
7.2
7.1
7
6.9
6.8
6.7
6.6
6.5
6.4
6.3
6.2
6.1
6
5.9
5.8
5.7
5.6
5.5
5.4
5.3
5.2
5.1
5
4.9
4.8
4.7
4.6
4.5
4.4
4.3
4.2
4.1
4
3.9
3.8
3.7
3.6
3.5
3.4
3.3
3.2
3.1
3
2.9
2.8
2.7
2.6
2.5
2.4
2.3
2.2
2.1
2
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2019
The obtained score confirms the previous conclusions of the financial analysis. Because
the value of the score is higher than 9, we can appreciate that the economic entity ALIX
ALUMINIUM ROMÂNIA S.R.L is in a comfortable situation, the probability of bankruptcy
being reduced.
Conclusions
According to the analysis of the profit and loss account, we can appreciate that the
company ALIX ALUMINIUM ROMÂNIA S.R.L. registers a constant increase of the self-
financing capacity and consequently increases the company's capacity to finance itself
from its own sources, therefore increasing the degree of financial autonomy. We conclude
that this increase is primarily due to the faster growth of the revenue index compared to the
expenditure index.
We mention the fact that the company was in a comfortable situation, the risk of
bankruptcy being reduced.
54
3 CONCLUSIONS and RECOMANDATIONS
The study was carried out at ALIX ALUMINIUM ROMÂNIA S.R.L, one of the main
wholesale distributors of aluminum profiles on the national market. Depending on the status
of the company and the object of activity, the company offers a wide range of products that
cover market requirements. The company also provides a range for a wide range of roller-
shutters.
The financial diagnosis made allowed the assessment of the company's financial
situation and performance, providing financial information both to those inside the company
and to those interested outside it. The data sources for the financial analysis were the
summary accounting documents: the balance sheet, the profit and loss account and annexes to
the balance sheet.
In order to perform the economic-financial analysis of the company, the following was
followed:
analysis of the financial balance;
results analysis;
analysis of financial flows;
the ratios system used in the financial analysis;
assessment of the risk of bankruptcy with the help of score functions.
The methods and techniques used were different, depending on the objectives of the
analysis, being presented in the following table:
55
Strong points:
Healthy economic management, with a net positive result in all three years analyzed.
The turnover experienced a remarkable evolution in 2019 registering an increase of
122.81% compared to 2017, following the increase in sales of goods.
The structure of the assets corresponds to the object of activity of the company.
Existence of surplus funding, materialized in petty cash and cash in bank accounts,
following a positive net cash flow in 2017, 2018,2019.
56
higher with the amount of 159.628 lei than in 2017 , and in 2019 compared to 2018 the
net result is higher with the amount of 39.445 lei
From the analysis of the presented data it results that the company ALIX
ALUMINIUM ROMÂNIA S.R.L. it registers a constant increase of the self-financing
capacity and consequently it increases the company's capacity to finance itself from its
own sources, thus increasing the degree of financial autonomy. This increase is
primarily due to the faster growth of the revenue index compared to the expenditure
index.
The company's position in a favorable area regarding the risk of bankruptcy
(reduced risk of bankruptcy).
Weak points:
Own working capital - in 2017, 2018 and 2019 the company registers a negative
own working capital which means that the fixed assets are only partially financed from
own sources.
Working capital requirement - there is a negative working capital requirement for
the three years analyzed, it means a surplus of temporary resources in relation to the
corresponding needs of working capital, so temporary needs lower than the possible
temporary sources to be mobilized.
Cash flow - the difference between the net cash of the two successive financial years
has negative records in 2018 and 2019, increasing, which suggests a decrease in the real
financing capacity of the company's investments as well as a decrease in net real asset.
The company ALIX ALUMINIUM ROMÂNIA S.R.L is in a period of investments in
fixed assets, which, in the conditions of non-collection at the contractual terms of the
receivables, determined a temporary financial imbalance, so that the company does not
register a favorable financial situation.
Recomandations
In order to restore the financial balance, I propose an improvement of the acid test
ratio by focusing mainly on the company towards sales with immediate settlement to the
detriment of sales on credit. This measure will have the effect of increasing the company's
availability and creating a positive working capital that can allow the full financing of
investments from stable resources, as well as the financing of current assets.
57
Regarding the degree of financial leverage, it can be appreciated that, although the
company registers a relatively high borrowing capacity rate (3.3), taking into account the
precarious financial balance,I propose a temporary stagnation of the process.
The analysis of the asset structure shows that the company focused on investments in
fixed assets, which gave it great stability in possible moments of economic crisis. The
analysis of the structure of the liabilities elements highlights that there is a financial stability
rate(solvency rate) below the optimal level of 2/3, fact for which I propose that the company
mainly aims at increasing the equity in relation to the total liabilities.
As the debt to equity ratio of the company is significantly higher than the optimal
value of 2/3, it is recommended to reduce the value of debts in total equity.
58
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1 ANNEXES
Nr.
ELEMENTS 2017 2018 2019
Crt
A. NON-CURRENT ASSETS
B. CURRENT ASSETS
G PROVISIONS - 6,123 -