Balance sheet analysis

The balance sheet analysis (also annual financial statement analysis ) deals with the examination of accounting companies with regard to their current and future economic situation on the basis of the annual financial statements , which are made up of the balance sheet , the profit and loss account and the appendix and, if necessary, supplemented by the management report . It can be carried out internally by the company itself or externally by analysts .

General

All activities aimed at obtaining information about the economic situation of a company preparing the balance sheet are called balance sheet analysis. As part of the balance sheet analysis, various business indicators and key figure systems of the accounting company are determined from the published annual financial statements , which are intended to provide information about the possibilities for meeting external requirements ( financial analysis) and for achieving future profits and company growth (economic and strategic analysis). The balance sheet analysis extends formally to the correctness of the annual financial statements and materially to the economic situation of the company to be analyzed.

The annual financial statements and their components were prepared by the accounting company on the basis of national or international laws. These laws not only require the preparation of annual financial statements, but also stipulate in more or less detail how they are to be formally and materially structured. The central regulation in German law for balance sheet analysis is Section 264 (2) HGB :

"The annual financial statements of the corporation must give a true and fair view of the asset, financial and earnings position of the corporation in accordance with the principles of proper bookkeeping."

Although these laws are intended to increase transparency for outsiders, they cannot prevent the accounting company from having great leeway in the presentation of its economic situation. Only the existing leeway gives the accounting company the option of accounting policy . Balance sheet cosmetics represent a special field here . It is about the classic balance sheet policy leeway that accounting companies usually use within the scope of the legal possibilities to present themselves positively to the public with their annual financial statements. With the external balance sheet analysis it can therefore be assumed that the analyst will not be able to determine the true economic circumstances.

Interested parties and reasons for the balance sheet analysis

Various interest groups would like to find out about the current and future situation of a company and for this purpose they carry out a - more or less detailed - balance sheet analysis. The main interested parties in the balance sheet analysis include:

• Creditors ( credit institutions , suppliers )
• Equity providers ( shareholders , shareholders , profit-sharing managers )
• Credit insurance
• Rating agencies
• Credit bureaus
• Corporate management ( management , board of directors )
• Employee
• Customers
• Tax office
• Competitors
• Public (municipality or city ​​council , press , population )

The reasons for an analysis vary depending on the interest group carrying out the analysis. External interested parties such as creditors or competitors are interested in the current situation ( earnings position ) and future development ( earnings power ). However, due to the lack of internal data, you can only get a rough overview. If the company carries out a balance sheet analysis itself ( internal balance sheet analysis ), this is usually done as a preliminary stage for internal controlling ( profit split ). Time comparisons, target / actual comparisons or benchmarks can be carried out. The balance sheet analysis is also suitable for preparing for a company valuation . External stakeholders make decisions based on the key figures determined as part of the balance sheet analysis.

Process of an annual financial statement analysis

The year-end analysis begins with the collection of relevant information. There are no standardized rules for balance sheet analysis, only the purpose of the analysis determines the scope, type and design of the analysis steps to be carried out. Those interested in balance sheet analysis (banks, insurance companies or rating agencies) can use balance sheet analysis systems.

Qualitative balance sheet analysis

The task of the qualitative balance sheet analysis is to overcome the mathematically abstract nature of the balance sheet and income statement by intensifying the evaluation of the appendix and the management report and thus to provide a better insight into the asset, financial and earnings situation.

Accounting

It is examined whether the company's accounting has changed compared to the previous year or whether there have been any differences to the so-called usual or standard accounting ( progressive accounting ). It is then analyzed whether the profit or other balance sheet items or items in the profit and loss account have been influenced by the change in accounting (e.g. by accounting options / discretionary scope for recognition and valuation).

Further information

If the company publishes additional voluntary information (e.g. order development) in addition to the data required by law , this is to be rated positively. Caution is advised with so-called pro forma key figures of the company, as these often deviate from the usual definitions.

Syntactic Analysis

As part of the syntactic analysis, it is examined which preferred word choice prevails and how precise the formulations are in the annual financial statements. Rather imprecise formulations (e.g. good sales development instead of sales increase from 30 million to 40 million ) can be a sign of a corporate crisis or obfuscation.

Semantic analysis

The frequencies of negative terms such as stagnation, deterioration etc. and positive formulations such as strengthening, maximizing etc. are counted.

Processing measures

The so-called structure balance sheet and structure profit and loss statement are formed by the preparation measures. These form the basis for the quantitative analysis. By offsetting, reclassifying and re-sorting individual items in the annual financial statements, the business situation of the company is represented more realistically than by the legal regulations. These measures help, for example, to better represent the debt service cover ability or the sustainable profitability of the company. Furthermore, the comparability with other companies in the same branch is increased. In particular, the processing measures are intended to eliminate influences from accounting policy leeway, special influences or tax distortions.

Quantitative balance sheet analysis

The quantitative analysis is primarily concerned with the formation of key figures. However, there is an abundance of different key figures, some with different definitions and minimum limits. Depending on the purpose, only a part is relevant. Therefore, the goals must be clearly defined before a balance sheet analysis. With these, suitable key figures can now be identified. The number should be appropriate. Too few key figures could give the wrong impression, too many jeopardize the overview. With many key figures, there is often the additional problem that additional data from internal accounting is required for the calculation. The key figures listed below can be determined directly from the annual financial statements.

Profitability analysis

• Return on equity
• Cash flow profitability

${\displaystyle {\text{Cashflow-Rentabilität}}={\frac {{\text{Jahresüberschuss}}+{\text{Abschreibungen}}}{\text{Gesamtkapital}}}}$

• Return on total capital before taxes
• Return on total capital after taxes
• Return on sales
• Capital turnover rate
• RONA / ROCE

With RONA (return on net assets) the denominator is defined from the assets side as fixed assets plus working capital , while with ROCE (return on capital employed) the denominator is made up of the liabilities side (total capital). As a result, the RONA characterizes the return on the assets invested, the ROCE the return on the capital employed:

${\displaystyle {\text{RONA/ROCE}}={\frac {\mathrm {EBIT} }{\text{Gebundenes Vermögen bzw. gebundenes Kapital}}}}$

Liquidity analysis

• Coverage ratio A
• Coverage ratio B
• 1st degree liquidity
• 2nd degree liquidity
• 3rd degree liquidity
• Cash flow

Asset analysis

• Asset intensity

${\displaystyle {\text{Vermögensintensität}}={\frac {\text{Anlagevermögen}}{\text{Umlaufvermögen}}}}$

• Asset intensity
• Orbital intensity

${\displaystyle {\text{Umlaufintensität}}={\frac {\text{Umlaufvermögen}}{\text{Gesamtvermögen}}}}$

• Stock intensity
• Fixed asset link

${\displaystyle {\text{Sachanlagenbindung}}={\frac {\text{Anlagevermögen}}{\text{Umsatzerlöse}}}}$

• Debt binding

${\displaystyle {\text{Forderungsbindung}}={\frac {\text{Forderungen aus Lieferungen und Leistungen}}{\text{Umsatzerlöse}}}}$

• Customer target
• Vendor target

Finance analysis

• Equity ratio
• Static leverage I
• Level of self-financing

${\displaystyle {\text{Selbstfinanzierungsgrad}}={\frac {\text{Gewinnrücklagen}}{\text{Eigenkapital}}}}$

Results analysis

• Personnel intensity
• Sales per employee

${\displaystyle {\text{Umsatz pro Mitarbeiter}}={\frac {\text{Umsatzerlöse}}{\text{Mitarbeiterzahl}}}}$

• Profit per employee

${\displaystyle {\text{Gewinn pro Mitarbeiter}}={\frac {\text{Betriebsergebnis}}{\text{Mitarbeiterzahl}}}}$

• Wage level

${\displaystyle {\text{Lohnniveau}}={\frac {\text{Personalaufwand}}{\text{Mitarbeiterzahl}}}}$

• Material intensity
• Manufacturing intensity

${\displaystyle {\text{Herstellungsintensität}}={\frac {{\text{Materialaufwand}}+{\text{Personalaufwand}}}{\text{Umsatzerlöse}}}}$

• Research intensity
• Investment coverage

Further information from key figures

In addition to individual key figures, extensive key figure systems can be used. Examples are:

• Du Pont scheme
• ZVEI key figure system
• RL key figure system

Based on the previous results, further key figures can now be calculated, which determine whether the company is value-adding. One of the best known is economic value added , which checks whether the net result after taxes is greater than the cost of capital.

Evaluation and analysis

Key figures alone have very limited informative value. A statement regarding the results can only be made through a comparison.

The following approaches can be chosen (among others):

• Time comparison : dynamization of the static balance sheet figures for trend recognition and estimation of future developments.
• Company comparison : The problem here is to find a comparable company, because there can also be big differences within an industry. For example, in a diversified company with different business fields, the industry affiliation is not clear. In addition, there are differences in the legal form, accounting and taxation to be taken into account
• Plan / target / actual comparison : Comparison of the planned figures with actual figures.

In addition to the key figures, additional information such as market trends and any future product difficulties (e.g. new tax plans, bans, etc.) must also be taken into account. The actual evaluation and analysis includes evaluations (good or bad economic conditions) and ends with the determination of a rating .

Limits of balance sheet analysis

In the context of the balance sheet analysis, there are numerous disadvantages that must be considered when assessing a company. The balance sheet analysis is based on the legal requirements for accounting within the framework of accounting law . This means that essential background information from accounting remains hidden from the analyst . Furthermore, the information in the annual financial statements is historical data that does not represent the current economic situation of a company. In the case of smaller companies, there is usually a long period of time between the preparation and publication of the annual financial statements. With large companies , quarterly reports bridge the gap in topicality. In addition, the data from the balance sheet and income statement are usually roughly aggregated , so that important detailed information is missing. In addition, it should be borne in mind that the individual balance sheet items and income statement can be strongly influenced by accounting policy (in particular valuation options and discretion within the framework of the principle of sensible commercial assessment in approach and valuation ) . It must therefore always be examined whether and to what extent a conservative or progressive accounting policy has been pursued by the company.

See also

• Municipal year-end analysis
• List of controlling instruments

literature

• Jörg Baetge , Hans Jürgen Kirsch, Stefan Thiele: Balance sheet analysis . IDW-Verlag, Düsseldorf 2004, ISBN 3-8021-1156-7 .
• Gerrit Brösel : Balance sheet analysis . ESV, 15th, revised edition, Berlin 2014, ISBN 978-3-503-15671-9 .
• Adolf G. Coenenberg : Annual accounts and analysis of the annual accounts . Schäffer-Poeschel Verlag, Stuttgart 2009, ISBN 3-7910-2770-0 .
• Andreas Eiselt / Stefan Müller: "IFRS: Design and Analysis of Annual Accounts", Erich Schmidt Verlag, Berlin 2011, ISBN 978-3503112388 .
• Klaus Henselmann: Annual financial statements according to IFRS and HGB . Books on Demand 2009, ISBN 3-83-704619-2 .
• Karlheinz Küting , Claus-Peter Weber: The balance sheet analysis . Schäffer-Poeschel Verlag, Stuttgart 2009, ISBN 3-7910-2867-7 .
• Laurenz Lachnit: Balance sheet analysis . Gabler, Wiesbaden 2004, ISBN 3-409-12695-3 .
• Michael Wehrheim / Thorsten Schmitz: Annual accounts analysis , Kohlhammer Verlag, 3rd edition, Stuttgart 2009, ISBN 3-17-0208683 .

Web links

• Evaluation methods and typification of the balance sheet analysis (scientific presentation with formulas and references)
• Key figures overview with calculation examples

Individual evidence

1. ↑ Volker H. Peemöller, Balance Sheet Analysis and Balance Sheet Policy : Introduction to the Basics , 2003, p. 205.
2. ↑ Volker H. Peemöller, Balance Sheet Analysis and Balance Sheet Policy : Introduction to the Basics , 2003, p. 209.
3. ↑ Karlheinz Küting / Claus-Peter Weber, The balance sheet analysis: Assessment of financial statements according to HGB and IFRS , 2004, p. 395 ff.
4. ↑ Frank Wohlgemuth, IFRS: Accounting Policy and Analysis: Design and Comparability of Annual Accounts , 2007, p. 205 f.