Different elements make it possible to analyze the financial situation of a company. We can cite the functional balance sheet, the financing table which offers a dynamic analysis but also the structure ratios and the turnover ratios.
They make it possible to obtain the level of working capital and the level of equity necessary for the activity but also to analyze the level of bearable debt.
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The analysis of the financial situation of a company makes it possible to answer a certain number of questions. It is a question of knowing if the cash flow is positive or not, if the company is in debt or even too much debt for example. It is made from the accounting balance sheet or the functional balance sheet and not from the profit and loss account.
Other elements such as the financial balance sheet or the economic and financial profitability calculations make it possible to assess the solvency of the company and the profitability of the company. They will not be approached here.
The ratios then help to compare the financial situation of companies of sometimes very different sizes.
How to assess the financial situation of a company?
To assess the financial situation of a company, it is necessary to start from the accounting balance sheet, or even from the functional balance sheet. The latter makes it possible to analyze the method of financing the WCR and to calculate some ratios.
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Financial situation and working capital
The analysis of the financial situation or financial structure can go through the construction of a functional balance sheet and the calculation of working capital, working capital requirement (operating and non-operating) and net cash.
The objective of this approach is to assess the financial balance of a company, sometimes taking into account its growth prospects to assess its investment needs, for example.
The level of working capital required is that which finances the lag between the cash flows and the cash flows of the operating cycle. To achieve this, the company uses stable resources such as equity or long-term loans or short-term financial debts, such as bank overdrafts.
Ideally, the working capital will be large enough to cover the working capital requirement and free up positive cash flow. It will also be partly provided by equity with a sufficiently high proportion to protect the company from a possible withdrawal from bankers. Its level varies according to the nature of the company’s activity and must be proportional to the WCR.
On average, the rate of coverage of working capital by working capital is around 70 to 80% depending on the sector of activity. These statistics are those of the central balance sheet of the Bank of France. It is a security for the company which loses its interest if the fixed asset is renewed too quickly or if the company is in debt.
The level of equity thus makes it possible to ensure or not the financial independence of the company. The more dependent a company is on its customers, the higher the level of equity capital gains. They represent between 30 and 40% of economic assets (fixed assets + WCR).
Analysis of the financial situation with ratios
Two types of ratios used in financial analysis make it possible to check the financial health of the company.
The first type are structural ratios, using large masses. It is thus possible to compare the total of tangible fixed assets and the total of the assets or even the shareholders’ equity or the financial debts compared to the total of the liabilities. We can add the ratio which allows to compare the financial debts with the shareholders’ equity to have the debt ratio of the company.
The second type of ratios to use are turnover ratios which detail the elements that make up the working capital requirement such as inventory, receivables and expressed in days.
Some of these ratios are presented in the following articles:
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