Financial assessment in 3 steps. Understand the dynamics of finance and find the story behind it.

This article only has a focus on sales and profit margin.

The first step is to put a logic in the sales and cost data by using a baseline. The current results of the last completed fiscal year is thus the basis of the relative comparison (year Y) with the data of previous fiscal years (Year Y-1). Based on the company strategy, a forecast can also be made for the next three years (Year FC+1).

This table-series then shows the logic of turnover evolution and costs.

Step 1: put data in perspective based on current year

Above stated example shows a logical growth of sales and demonstrates that EBIT and share value are also logical increasing. The future average value is higher than past average value. Those figures show only green flags.

Second step is to focus on sales.

Step 2: what is the sales evolution?

The equation hides a lower growth rate towards 5% and the strategy is eager to rejoin the higher growth rates of the past. In which markets did the growth slowdown occur and why? What actions have been put in place to bring back the expected increase? Why is the run-up period so long to get back to above 5% growth?

Third step is relative analysis of each year to compare the KPI.

Step 3: Investigate the changes in EBIT

Serial comparison of the yearly KPI, show a worrying trend concerning the gross margin (EBITDA). The gross margin is getting lower due to the increased percentual part of purchasing costs (COTS). This means that either relatively more is being outsourced. This should then reduce SG&A costs.

Or it means that the increase of costs is not sufficiently back-loaded into sales. In conclusion, the increase in sales shows that the organisation works harder, but less is being earned.

The above 3-step approach allows you to make your own decisions and describe the red and green flags.

Questions and comments are always welcome from Stefan Verhauwen