Understanding Balance Sheets, P&L, and Financial Ratios
Balance Sheet
Assets
Non-Current Assets
- Tangible Assets:
- Land and Natural Resources
- Buildings
- Plant
- Machinery
- Furniture
- Computer Equipment
- Transportation Elements
- Intangible Assets:
- Patents
- Software Applications
Amortization: Represents the decrease in value of fixed assets due to use, aging, etc. There are two types: Amortization of Tangible Assets and Amortization of Intangible Assets. The purpose of depreciation is to recover the invested money.
Current Assets
- Inventory: Raw materials, finished goods, merchandise.
- Receivables: Clients, temporary financial investments, trade receivables, Social Security, VAT debtor, Tax Authorities.
- Available: Bank, Cash.
Total Assets
Liabilities and Equity
Equity
- Capital
- Reserves
- Income Statement
Non-Current Liabilities
- Provisions for Assets
- Long-Term Payables
- Long-Term Debts to Credit Institutions
Current Liabilities
- Suppliers
- Short-Term Payables
- Creditors
- Short-Term Debts to Credit Institutions
- Tax Liabilities (various concepts)
- Social Security
- Pending Payments
Total Liabilities
* Assets = Liabilities + Equity
** Working Capital = Current Assets – Current Liabilities. If Working Capital is positive, the company is in a good position. If it is negative, the company may struggle to pay its debts.
Profit and Loss Account
| Expenditure | Income | ||
|---|---|---|---|
| Expenses | Revenues | ||
| Merchandise Purchases | Sales of Merchandise | ||
| Raw Material Purchases | Revenue from Services | ||
| Sales Returns | Purchase Rebates | ||
| Sales Rebates | Purchase Refunds | ||
| Inventory Changes | Lease Income and Benefits | ||
| Leases and Royalties | Interest Income | ||
| Independent Professional Services | |||
| Transportation | |||
| Banking | |||
| Supplies | |||
| Income Tax | |||
| Other Taxes | |||
| Wages and Salaries | |||
| Social Security (Company’s Contribution) | |||
| Interest on Long-Term and Short-Term Debts | |||
| Short sales off payment | |||
| Depreciation and Amortization of Fixed Assets |
Financial Ratios
A ratio is an indicator that, through the relative comparison of two values expressed as a quotient, analyzes a specific aspect of a company’s situation, noting whether it is near or far from an optimal or critical value. Ratios are used to compare the evolution of companies.
Key Financial Ratios
- Treasury Ratio: (Realizable + Available) / Current Liabilities. Optimal value: 0.8-1.2
- Liquidity Ratio: Current Assets / Current Liabilities. Optimal value: 1.5-1.8
- Warranty Ratio: Total Assets / Total Liabilities. Optimal value: 1.7-2
- Availability Ratio: Available / Current Liabilities. Optimal value: 0.3-0.4
- Autonomy Ratio: Equity / Liabilities. Optimal value: 0.8-1.5
- Debt Quality Ratio: Non-Current Liabilities / Total Liabilities. Optimal value: 0.2-0.5
Functional Model for Results
Operating Income – Operating Expenses = EBIT (Earnings Before Interest and Taxes)
EBIT – Financial Expenses = EBT (Earnings Before Taxes)
EBT – Taxes = Net Profit
Economic Performance = EBIT / Assets
Financial Performance = Net Profit / Equity