💲𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑺𝒕𝒂𝒕𝒆𝒎𝒆𝒏𝒕𝒔 𝑨𝑩𝑪💲

As always in December and January, the busy season for accountants hit me full force, which is why nothing came from me here on GQ for quite some time. A time when Accountants and public Accountants (Wirtschaftsprüfer) face each other as gladiators in the Zaubermanage. In the end, only one comes out of the duel unscathed...and you know who that is...the master of the 4 elements HGB, OR, IFRS and Swiss GAAP FER. So here I am and I want to give you some more basics to get you started in the world of elementary magic.

𝘈𝘤𝘤𝘰𝘶𝘯𝘵𝘢𝘯𝘵: "𝘚𝘰𝘮𝘦𝘰𝘯𝘦 𝘸𝘩𝘰 𝘥𝘰𝘦𝘴 𝘱𝘳𝘦𝘤𝘪𝘴𝘪𝘰𝘯 𝘨𝘶𝘦𝘴𝘴𝘸𝘰𝘳𝘬 𝘣𝘢𝘴𝘦𝘥 𝘰𝘯 𝘶𝘯𝘳𝘦𝘭𝘪𝘢𝘣𝘭𝘦 𝘥𝘢𝘵𝘢 𝘱𝘳𝘰𝘷𝘪𝘥𝘦𝘥 𝘣𝘺 𝘵𝘩𝘰𝘴𝘦 𝘰𝘧 𝘲𝘶𝘦𝘴𝘵𝘪𝘰𝘯𝘢𝘣𝘭𝘦 𝘬𝘯𝘰𝘸𝘭𝘦𝘥𝘨𝘦. 𝘚𝘦𝘦 𝘢𝘭𝘴𝘰 𝘮𝘢𝘨𝘪𝘤𝘪𝘢𝘯, 𝘸𝘪𝘻𝘢𝘳𝘥"

So, in order to analyze companies it needs a basic knowledge of how to read and interpret annual reports. Therefore, in this post I would like to briefly explain to you how the individual sections are structured and what information they give us. I am referring exclusively to the financial report. Because in the annual report, in addition to the financial report, there are other helpful sections for your due diligence that give you insights into the strategy, challenges, management or risks of the company. These require less explanation, but are no less relevant!

Finally, I give you a small learning task and link you to the annual report of Novo Nordisk (pharmaceutical company from Denmark - no investment advice, I am invested myself!) as well as individual questions about it. So you can check for yourselves if my contribution has helped you and implement the learnings directly. The corresponding solutions are of course available in the comment function.

𝐈𝐧𝐡𝐚𝐥𝐭𝐬𝐯𝐞𝐫𝐳𝐞𝐢𝐜𝐡𝐧𝐢𝐬:

I. Income Statement

II. balance sheet

III. cash flow statement:

IV. Learning Task

V. Conclusion

So how do I properly read and interpret corporate financial reports?

The financial report is divided into three main sections (income statement, balance sheet, cash flow statement). But what questions are answered in these statements on the income statement, balance sheet and cash flow statement, and what exactly do you do with the answers? I would now like to explain all this to you in more detail. The ABC of Financial Statements awaits you :)

𝐈. 𝐄𝐫𝐟𝐨𝐥𝐠𝐬𝐫𝐞𝐜𝐡𝐧𝐮𝐧𝐠/𝐈𝐧𝐜𝐨𝐦𝐞 𝐒𝐭𝐚𝐭𝐞𝐦𝐞𝐧𝐭

Basic question answered: Is the company profitable?

-->Disclosure of the profit situation!

𝘋𝘪𝘦 𝘌𝘳𝘧𝘰𝘭𝘨𝘴𝘳𝘦𝘤𝘩𝘯𝘶𝘯𝘨 𝘴𝘢𝘨𝘵 𝘢𝘶𝘴:

-How efficient is the company?

-How profitable is the company?

-Where and how could the company make better decisions?

-What are the costs and how can they be controlled?

Basic structure:

Sales - Expenses = Profit

-Turnover = The turnover of a company is composed of all the revenues that a company generates through the sale of goods or its services. [1]

Subtracting the expenses incurred from the revenue generated yields the profit. [1]

-Expenses = Periodized expenses of a business for goods, services, and government charges consumed during an accounting period, which are compared to revenues in the income statement (other: Costs). [2]

Expenses can be broken down into:

-Cost of goods sold: what it costs the company to produce the product to generate revenue. Sales less cost of goods sold = Gross Profit.

Gross margin = gross profit / sales

-Overhead Expenses: Costs that are required to keep the business running but cannot be directly attributed to the revenue or product/service produced. These can be broken down into fixed costs (no matter how much is produced and sold, the fixed costs never change - e.g. rent) and variable costs (which vary according to activity/productivity - e.g. electricity).

Net margin = net profit / sales

Net profit = profit minus all expenses

Net margin and gross margin and the costs included in them thus provide information on whether the company has a sensible and efficient cost allocation. Maybe the company has too high costs for administrative things or even interest for loans, even compared to the competition. It is also possible that the production costs are too high, which affects the margins.

The profit and loss statement can be prepared according to the total cost method (TCO) or the cost of sales method (COS). This results in different classification structures. However, the content or the informative value is the same.

𝐈𝐈. 𝐁𝐢𝐥𝐚𝐧𝐳/𝐁𝐚𝐥𝐚𝐧𝐜𝐞 𝐒𝐡𝐞𝐞𝐭

Basic question answered: Is the company healthy?

-->Presentation of the financial position!

𝘋𝘪𝘦 𝘉𝘪𝘭𝘢𝘯𝘻 𝘴𝘢𝘨𝘵 𝘢𝘶𝘴:

-How much cash does the company have on hand?

-Can the company pay its bills?

-How much are the liabilities?

-Do the assets cover the liabilities?

-What is the ratio of debt/liabilities to equity/equity (the lower the better)?

-How high is the equity ratio (equity/assets)?

The balance sheet is composed of:

A. Assets/Assets:

→Everything you own!

-Cash,

-Inventories,

-trade receivables,

-machinery,

-buildings,

etc.

B. Liabilities

→Everything that is owed to someone in some form!

-Trade payables,

-Tax liabilities,

-bank loans,

etc.

C. Equity

→Says what one is "worth!"

If you sell all your assets and pay liabilities, equity is the value that remains.

Composition of Equity:

-share capital

-Annual surplus/profit of the current year (comes from the income statement/income statement).

-Profit carried forward/Retained earnings (accumulated profits of previous periods - These come from the income statement and are in principle the net profits of the previous years)

-Profits withdrawn from the company in the form of dividends.

-Own shares/Treasury shares

-Capital reserves

Equity is the basis of the relative valuation ratio KBV (market capitalization / equity).

DE: Equity = Assets - Liabilities

ENG: Equity = Total Assets - Total Liabilities

In contrast to the income statement, the balance sheet contains stock figures. In principle, this means nothing other than that my balance sheet continues over the following years. In the income statement we start at 01.01. of a year (if the FY lasts from 01.01. to 31.12.) always again at 0, similar to your tax return. Your income, which you have to pay tax on, you also have to pay tax on only in the year of accrual (inflow principle) and not cumulatively on the following years. In the same way, sales and expenses are only shown once in the reporting period. The balance sheet, on the other hand, shows all inventory figures (machines, inventories, cash, etc.), which can reappear in the following year.

𝐈𝐈𝐈. 𝐆𝐞𝐥𝐝𝐟𝐥𝐮𝐬𝐬𝐫𝐞𝐜𝐡𝐧𝐮𝐧𝐠/𝐂𝐚𝐬𝐡𝐟𝐥𝐨𝐰 𝐒𝐭𝐚𝐭𝐞𝐦𝐞𝐧𝐭:

Fundamental question answered: Can the company survive?

𝘋𝘪𝘦 𝘎𝘦𝘭𝘥𝘧𝘭𝘶𝘴𝘴𝘳𝘦𝘤𝘩𝘯𝘶𝘯𝘨 𝘴𝘢𝘨𝘵 𝘢𝘶𝘴:

-How much cash did the company receive and how is/was it used during the fiscal year?

A distinction is made between whether the cash came from:

-Operating activities (cash flow from operating activities)

-investing activities (cash flow from investing activities)

-financing activities (cash flow from financing activities)

originates from.

A. Cash flow from operating activities

-Cash outflow from rental payments

-Cash from sales of products/services (as soon as customer pays)

-Cash outflow from tax payments

-Cash outflow from payment of wages and salaries

B. Cash flow from investments (cash flow from investing activities)

-Purchase and/or sale of assets/assets

-Purchase and/or sale of machinery

C. Cash flow from financing activities (Cash flow from financing activities)

-Cash from capital increases

-Cash outflow from dividend payments

-Cash outflow from share buybacks

-Cash outflow from borrowings

-Cash outflow from loan repayments

Cash at the beginning of the period (01.01.xx) +/- changes during the period (from A,B and C) = Cash at the end of the period (31.12.xx)

Cash at the end of the period (31.12.xx) = Cash on the balance sheet (asset)

Target:

postive cash flow!

Free cash flow (FCF) = Cash flow from operating activities - Cash flow from investments

The FCF indicates how much cash flow is still available to the company in order to pay dividends or repay loans at the end. It is freely available to the company. [3] Therefore, this key figure is very important in balance sheet analysis and for shareholders! It can also provide information on the extent to which the company acts in a shareholder-friendly manner or is more concerned with repaying debts first.

The cash flow statement can be prepared using the direct or indirect method. However, the end result is always the same.

𝐈𝐕. 𝐋𝐞𝐫𝐧𝐚𝐮𝐟𝐠𝐚𝐛𝐞

Go to Novo Nordisk's homepage and open the Annual Report 2021 in the "Investors" section (homepage: https://www.novonordisk.com/). If you want to skip this learning effect use the following link which will open the Annual Report as PDF directly:

https://www.novonordisk.com/content/dam/nncorp/global/en/investors/irmaterial/annual_report/2022/novo-nordisk-annual-report-2021.pdf

Go there to the relevant section and answer the following questions:

Income statement:

1) For fiscal year 2021, what are the following (in DKK million)?

a. Sales or net revenue

b. Cost of goods sold

c. Gross profit

d. Gross margin

e. Net margin

f. EBT*

*EBT = Earnings before taxes

Balance sheet:

2) For the fiscal year 2021, what are the following (in DKK million)?

a. Total assets

b. Total Liabilities

c. Equity

d. Equity ratio

Cash flow statement:

3) What is the free cash flow (FCF) for fiscal year 2021 (in DKK million)?

4) How many dividends were paid in fiscal year 2021 (in DKK million)?

5) How many shares were repurchased by the company in fiscal year 2021 (in DKK million)?

𝐕. 𝐒𝐜𝐡𝐥𝐮𝐬𝐬𝐰𝐨𝐫𝐭

I hope you were able to take away a lot of useful information from my explanations and assignments. With this post I wanted to give you the basics of income statement, balance sheet and cash flow statement. If you have internalized these, feel free to read my more advanced posts (link follows). Because now you have the tools to understand them even better. In the same way you will be able to interpret my stock analyses better. As a small support I add a nice chart of Damodaran (I already introduced him as "Valuation Guru"), also visible in his blog:

https://aswathdamodaran.blogspot.com/

To quote Damodaran here:

"Much of the raw data that you use in corporate finance and valuation comes from accounting statements, and if you do not understand the difference between operating and net income, you are fatally handicapped. If your accounting basics are strong, you can move right along..."

So I hope you understand that the accounting basics are indispensable to be able to perform deeper company valuations.

Building contributions:

-Value Investing - Buffett

https://app.getquin.com/activity/XcuRrJwmyP

-The little guide of valuation

https://app.getquin.com/activity/laOUVhfFDI?lang=de&utm_source=sharing

Sources:

[1]

https://www.bwl-lexikon.de/wiki/umsatz/

[2]

https://wirtschaftslexikon.gabler.de/definition/aufwendungen-30077

[3]

https://www.bwl-lexikon.de/wiki/free-cash-flow/

Additional sources:

Annual Report Novo Nordisk; https://www.novonordisk.com/content/dam/nncorp/global/en/investors/irmaterial/annual_report/2022/novo-nordisk-annual-report-2021.pdf

https://www.novonordisk.com/investors/annual-report.html

Image:

https://www.merchantmaverick.com/quick-guide-accounting-terms-concepts/

#theaccountant

#accounting

#bilanzen

#valuation

#learn

The importance of gross margin in times of high inflation

Reading time: approx. 5min

There are many different financial ratios that can be calculated from a company's balance sheet. One metric that has become indispensable to me is Return on Capital Employed (ROCE). This can be calculated through various entries from the balance sheet and is a measure of how efficiently a company can use invested capital to generate profits.

In this article, however, we will focus on a much simpler indicator: the gross margin. In German-speaking countries, the gross margin is better known as the gross margin is better known. It indicates the proportion of sales which, after deduction of direct production costs or manufacturing costs - the so-called cost of revenues - remains.

Example: the company Pomme achieves $1,000 in sales and has to pay $600 in production costs. The gross margin is then

(1.000$ - 600$) / 1.000$ = 400$ / 1.000$ = 40%.

The 400$ in this example is the Gross Profit or the gross profit. The Gross Margin is a very simple ratio and can also be interpreted in a wonderful way: the company Pomme manufactures its products (proportionally) for 6$ and sells them for 10$ to the customers. The higher the margin between production costs and sales revenue, the more lucrative the business model.

However, the gross margin is not yet the profit margin of a company. In the cost of revenues includes, for example, manufacturing costs, raw material costs, energy costs and labor costs. However, no costs incurred for the sale or distribution of the product. The costs are reported under selling, general and administraive expenses (SG&A) in the balance sheet. Research and development expenses - i.e. research and development expenses (R&D) - are not yet included in the gross margin.

The company Pomme from the above example now has costs of $70 for the sale and distribution of its products and spends another $70 on research and development. If we subtract this from the gross profit, we get the so-called operating income:

Revenue

-
Cost of Revenue

=
Gross Profit

-
Selling, General & Administrative Expenses

-
Research & Development Expenses

=
Operating Income (=EBIT)

For Pomme it looks like this in percentage terms:

100% Revenue

- 60% Cost of Revenues

=
40% Gross Margin

- 7% SG&A

- 7% R&D

=
26% Operating Income Margin

This is still not the actual profit, because, as you know, taxes still have to be paid on profits. However, we will no longer take this into account and will only look at operating income. In the case of Pomme this means that of $1,000 in sales, about $260 remains as profit (before taxes) for the company. The higher the operating income margin, the more profitable a company is.

However, this article is not about the operating income margin but about the gross margin. The size of the gross margin can be an indicator for the pricing power of a company. In this article, however, we will focus on another aspect: a company's resistance to inflation. Here, gross margin plays a crucial role.

Two pretty much identical companies?

Let's look at two companies Apple and Pear. We break down their costs as a percentage of sales:

Company Apple

100% Revenue

- 30% Cost of Revenues

=
70% Gross Margin

- 25% SG&A

- 15% R&D

=
30% Operating Income Margin

Company Pear

100% Revenue

- 55% Cost of Revenues

=
45% Gross Margin

- 10% SG&A

- 5% R&D

=
30% Operating Income Margin

Both companies have a thirty percent EBIT margin and are therefore highly profitable companies. However, if we focus our attention on the gross margin, we will notice: Apple has a gross margin of 70% while Pear has a gross margin of 45%. This seems to be irrelevant at first, because in the end both companies achieve a profit of $300 from $1,000 in sales.

However, in a period of high inflation, not all costs of a company increase equally. In particular the cost of revenueswhich includes manufacturing costs, labor costs, raw material costs and energy costs, will increase roughly in line with inflation, whereas the other cost items are not subject to inflation to the same extent.

In this example, we assume an annualized inflation of 8% is assumed. We assume in the hypothetical scenario that other expenses do not change in percentage terms. What do the balance sheets of the two companies look like after inflation?

Apple company

100% Revenue

- 32.4% Cost of Revenue (+2,4%8% inflation)

=
67.6% Gross Margin

- 25% SG&A

- 15% R&D

=
27.6% Operating Income Margin

Company Pear

100% Revenue

- 59.4% Cost of Revenue (+4,4%8% inflation)

=
40.6% Gross Margin

- 10% SG&A

- 5% R&D

=
25.6% Operating Income Margin

The operating margin of Apple fell from 30% to 27.6% due to inflation. This corresponds to a profit decrease of 8%. The situation is quite different for Pear the operating margin fell from 30% to 25.6%. A decrease of about 15%!

So although both companies are subject to the same inflation rate of 8%, the company with the lower gross margin is hit harder and would have to cope with a drop in profits of just under 15% - all other things being equal. To avoid a drop in profits would have to be Pear would have to increase prices by 15%, whereas Apple would only have to increase prices by 8%.

If both companies are direct competitors, it is even more paradoxical: Apple with its high gross margin probably has a high pricing power anyway and only has to increase prices by 8% to compensate for the increased production costs. In contrast, the competitor Pear would have to increase its prices by a full 15% to achieve the same effect. Either Pear decides to increase its prices by 15% and has to accept that some customers will switch to apple. Apple or the increased production costs cannot be passed on directly to the customer, which reduces future profits.

Summary

The above is of course an idealized example which probably does not occur in practice. However, it is also not an academically constructed example and this effect can indeed be observed in companies: while LVMH ($MC) was able to keep its gross margin constant at around 68% from 2021 to 2022, Target ($TGT) saw its gross margin drop from around 29% to around 24%, driven by the higher cost of revenues. In the same period, Target's profits also declined by around 14% on slightly higher sales.

#bilanzen
#kennzahlen
#finanzen

Haaaaaatschi 🤧 - Financial health in theory and practice 💸💸💸

Hi folks,

it continues in the program! And this time it will be about the financial health of a company. When is a company financially healthy? What figures can I use to determine this and where can I find them in the balance sheet and income statement? Which key figures result from this and how do I interpret them?

As if this were not enough dry theory, I will give you the practical example with $AUTO from my last article and original excerpts from their financial statement.

The article is definitely written in a beginner-friendly way, with a focus on the context of things.

Rightly you are now falling out in jubilation. From my last posts have always, in subsequent discussion round in the comments, many new food for thought, which then made it a few days later itself again in a post, which in turn has provided in the comments for new food for thought, which in turn ... You know what I mean.

The last post was my company introduction to the Norwegian warehouse technology specialist AutoStore. You can read it again here: https://app.getquin.com/activity/hkCUVRxQHh?lang=de&utm_source=sharing

Admittedly, you could argue that it was more of an introduction to the product than the company. @BASS-T I commented logically that I should go into more detail about the balance sheet and figures.

@RealMichaelScott gave additional impulses with his important key figures.

Thanks for this and all the other comments 🙏.

What have I done with it now? Well, sat down, learned to read the balance sheet and P&L and wrote this article as a final exam 🚀

Yesterday the master himself @TheAccountant89 put together a post on reading and understanding balance sheets, P&L and income statements. If you haven't already, be sure to read, like and leave a ccf! It's worth it!

Before it really starts at this point again the note that I have until a few weeks ago with P&L professionally still thought of "weight and volume check" and not "income statement" 😅 If gross blunders have crept in or I have something despite careful research and my opinion that I understood it, misrepresent, so please point it out to me, I will then correct it.

What do you expect?

Healthy is,

I. who is not ill

II. who can pay a lot himself (equity ratio)

III. who can pay off loans flexibly from own account (gearing)

IV. who can pay off loans through current income (dyn. debt ratio)

V. who plans correctly when spending money (goodwill ratio and depreciation)

I. Healthy is the one who is not sick

From a biomedical point of view, health is defined as the absence of disease. Clearly, if one leaves out the psychological, mental and social health of a person, what remains is physical health limited purely to functionality. Since one rarely finds mental and social aspects in profit-oriented companies, especially with regard to their finances and how they deal with them, we want to use the same definition of health to research the well-being of our company under consideration.

So: Is our patient dying? Does he only need a few (financial) injections? Or can he claim to be in top shape? Let's try to find out on the basis of the following key figures.

The whole thing happens in 3 steps per key figure. First, I will tell you a little bit about the theory, so to speak an introduction to the key figure under consideration. Why is it needed, what does it say and how is it calculated? For the formulas I mainly used Nicolas Schmidlin's book Business Valuation and Ratio Analysis oriented. I give it below as a source, but it served primarily to get an overview in the first place. Because I really wanted to understand every written word, I also did a lot of research on the internet. I will not reproduce or type anything one-to-one from the book here, but will reproduce my own words.

As a result, I have created a reusable Excel list from the chapters of the book, in which I only have to enter the values from the balance sheet and P&L, and which then calculates the most important key figures for my financial health.

Let's go.

II. equity ratio

Theory

The overview of a company's capital structure gives a first and, above all, quick insight into how the company finances its assets.

While on the assets side of a balance sheet we have all the assets of a company listed, on the liabilities side, we get all the necessary information about where the money for those assets comes from.

The company's capital is fundamentally divided into equity and debt. Equity, which is also known as book value or equity, comes mainly from the shares issued by the company.

The debt capital can be bank loans or issued corporate bonds.

The more equity a company has, the better it can pay off debts, make investments and cover costs.

This is why we investors strive to invest in companies with a high equity ratio, i.e. the proportion of equity in total assets, as this allows us to virtually rule out major liquidity bottlenecks and to know that our company under consideration can also be better maneuvered through times of crisis.

Practice

To calculate the equity ratio, we need once the values for the equity and the balance sheet totalwhich corresponds to total assets. Figure 1 shows AutoStore's "Statement of financial position" from Q3/2022, in which the following values are highlighted total equity for equity and Total Assets for the balance sheet total/total assets. We insert the values into the formula and calculate AutoStore's equity ratio.

(Equity / Total Assets) = Equity Ratio

(1.195,2 / 1.831,7) = 0,65 * 100 = 65%

Opinion

With an equity ratio of 65%, AutoStore is doing quite well. We can see from this ratio that AutoStore can act relatively independently when it comes to investing in the future. We have a reduced risk of insolvency and run less risk of running into over-indebtedness in the near future. However, the analysis of other key figures in the following points shows us that the equity ratio is only an initial assessment based on two values.

II Gearing

Theory

If the company borrows from banks, the loans are included in the balance sheet under interest-bearing liabilities or simply Financial liabilities. Liabilities are all obligations of a company to third parties. So if we have financial liabilities, it is nothing more than: Debt. And debts of course play a major role when considering financial health. We have already been able to determine the amount of debt indirectly via the equity ratio. Now it's a matter of how flexibly the company can pay off its debts. To pay off debt, the company can first fall back on its existing cash holdings. This is all the money that the company can loosen up in the short term and is generalized as follows liquid funds called. Now the gearing would like to try to clarify how the company can pay off the remaining debts with the help of its equity.

Practice

First, we need all the financial liabilities from the balance sheet. Figure 2 has all of these highlighted in blue. In the case of AutoStore, this includes the Non-current interest bearing liabilities (long-term interest-bearing liabilities), Non-current lease liabilities (long-term lease liabilities), interest-bearing liabilities (short-term) and lease liabilities (short-term).
In total, this amounts to USD 421.2 million.

We can now deduct from this the cash and cash equivalents (cash and cash equivalents). We have already read out the shareholders' equity in section I.

(financial liabilities - cash and cash equivalents) / equity = gearing

(421,2 - 147,2) / 1195,2 = 0,2292 * 100 = 22,92%

Opinion

In general, the lower the gearing, the lower the company's debt. According to [1], 10% - 20% is considered ideal. A company would be debt-free if it had more liquid assets than financial liabilities. With a gearing of 22% and an equity ratio of 65%, AutoStore's debt is low for the time being. If the company had to repay its debt in one fell swoop tomorrow, it would still be able to operate thanks to high cash reserves and equity. In my opinion, this is a solid outlook for the coming quarters.

III. dynamic leverage ratio

Theory

Let's imagine we have to pay off a loan to the bank and do so from our savings in our account. The whole thing would only make sense if, on the one hand, we are not completely broke afterwards and, on the other hand, we generate further income so that we can still afford something and continue to build up assets even after all debts have been repaid.

So what does that mean? Even if a company has low gearing, this ratio should also be considered in relation to the free cash flow. free cash flow of the company.

The free cash flow is the result of the operating cash flow minus the cash flow from investing activitiesboth of which can be read from the income statement. If the free cash flow is positive, the company has generated profits and increased its assets in the period under review. If the free cash flow is negative, the company is making losses.

It is therefore interesting for us investors to find out whether a company can repay its debts solely through profits generated and whether the low level of debt determined by gearing is confirmed when cash flow is taken into account.

The result of the calculation that follows immediately is the duration in years that the company would need if it were to use its entire free cash flow to repay its debt.

In addition, the dyn. debt-equity ratio can be an indicator for future capital increases. If the profit is constantly positive and can be used to repay debt, a capital increase in equity would thus become less likely.

Practice

We already know the financial liabilities and liquid funds, we now have to calculate the free cash flow to be determined. Sometimes it is listed directly, sometimes we have to calculate it. In the case of AutoStore, we need the Net cash flows from operating activities (operating cash flow) and the Net cash flows from investing activities (cash flows from investing activities) from the income statement in Fig. 3, which we subtract from each other.

(financial liabilities - cash and cash equivalents) / free cash flow = dyn. debt-equity ratio

(421,2 - 147,2) / 39,9 = 6,86

Opinion

At almost even 7 years, AutoStore's dynamic debt ratio is quite high, even critical according to Schmidlin. It would take 7 years to pay off the debt while profits remain the same. As a reminder, AutoStore has been profitable for the first time in 2022. The decisive factor will be the curve in which direction this ratio develops. Therefore, the dyn. leverage ratio is an important key figure for the next quarterly figures and the annual report coming soon, whether the positive development is confirmed. If profitability and free cash flow increase, the debt-equity ratio would decrease.

IV. Goodwill share and amortization

Theory

When it comes to financial stability, we naturally look mainly at the current situation, simply by counting on the figures for the past fiscal year or quarter. But there are also indications of what the financial health will be like in the future. One of them is to look at the goodwill written off in relation to equity.

What was goodwill again? If we buy up a company, we hope to achieve synergy effects, true to the motto that we can do more together than we can alone. However, since these synergy effects cannot be quantified by adding up pure assets, they appear in the balance sheet as a special item, goodwill.

Goodwill is therefore an amount that our company was willing to pay on top of the actual purchase price of the company we want to acquire.

The goodwill itself is not yet the problem, it could only become a problem if it turns out that the desired synergy effects do not materialize or do not materialize in the hoped-for form. What happens if this is the case? Then the goodwill has to be reduced, i.e. written off, which means that this sudden hole in the cash register has to be financed, and from what? Correct, the profit of the company, which we as investors definitely do not want.

That's why you read more often about a ticking time bomb of goodwill, because it simply represents a risk for investors, as profits could be diminished in the future.

Because goodwill itself has little significance as a pure figure, it is put in relation to equity. The question to be answered is to what extent possible write-downs are covered by equity. The lower the result here, the better.

Practice

The Goodwill can be found directly written out in the balance sheet. We already know the equity.

Goodwill / equity = goodwill share

996,2 / 1.195,2 = 0,8335 * 100 = 83,35%

Opinion

The goodwill ratio at AutoStore, there is no other way to put it, is definitely too high and not healthy. The only way the company can get down from 83% is to write off goodwill or to increase its equity, e.g. by issuing new shares. Both would be clearly negative from a shareholder perspective.

Conclusion - Financial Health AutoStore

Looking at today's situation, more precisely the situation in Q3/2022, AutoStore is in a good position at first sight. The equity ratio gives the company enough room to pay off debts and invest in the future, but the gearing in connection with the dynamic gearing ratio already gives us reason to believe that in the future it will be important to take a closer look at these values. The goodwill share is too high and to keep my personal risk-return ratio, as much as I like the product, AutoStore does not get beyond a smaller position in my portfolio.

On February 16, we'll have the Q4 numbers and thus the full year 2022. Thanks to our exposure to the balance sheet and cash flow, we now know what to look for, can draw a curve and make an investment decision based on that.

So it remains exciting.

Finally, I would like to know from anyone who has more of a clue than I do, if you would come to the same conclusion based on the numbers mentioned.

Thank you for reading ❤

Sources:

[1] Book: company introduction and ratio analysis - Nicolas Schmidlin. ISBN: 978-3800645640

[2] https://4565296.fs1.hubspotusercontent-na1.net/hubfs/4565296/04%20Website%20Docs/IR/Q3%202022/Q3%20Report%202022.pdf

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