Financial analysis: collection of case studies


N. Kazakova, I. Dun, M. Bobkova



            Financial analysis: collection of case studies














Москва





                znanium com





электронно-библиотечная система

Инфра-М

2018

N. Kazakova, I. Dun, M. Bobkova



            Financial analysis: collection of case studies



Пособие














Москва

Инфра-М; Znanium.com

2018

     UDC 338.3 (075)

     LBC 65.053 j73
     K14








    Kazakova, N.
          Financial analysis: collection of case studies / N. Kazakova, I. Dun, M. Bobkova. - Moscow: Infra-M; Znanium.com, 2018. - 54 p.
    ISBN 978-5-16-106744-4 (online)


    Collection of case studies is a supplement to the textbook "Financial analysis". Its aim is the formation of students ' practical skills of analysis, selection and evaluation of analytical information to implement effective economic policies of business entity, for the preparation and adoption of reasonable management decisions, planning and monitoring.
    The book is for bachelors, masters, listeners of courses of improvement of qualification, including the second higher and distance education, as well as all future and practicing business analysts.






                                                © N. Kazakova, I. Dun, M. Bobkova, 2016, 2018

ISBN 978-5-16-106744-4 (online)

    UDC 338.3 (075)
    LBC 65.053 j73
    K14

Authors:
    Nataliya Kazakova -doctor of economic sciences, professor, head of Business analysis department of Plekhanov Russian University of Economics.
    Irina Dun-candidate of economic sciences, associate professor of Business analysis department of Plekhanov Russian University of Economics.
    Marina Bobkova-senior lecturer, Business analysis department of Plekhanov Russian University of Economics.
    Victoria Nevar- translation of the case studies.
Reviewers:
    J. Kevorkova -doctor of economic sciences, Professor of the audit and financial control department of the Financial University under the Government of the Russian Federation.
    N. Karzaeva -doctor of economic sciences, Professor, head of economic analysis and audit department of Russian Timiryazev State Agrarian University.

            Financial analysis: collection of case studies/ N. Kazakova, M. Bobkova — M. — Tel-Aviv: «E.RA» publishing, 2016. — 54 p.

            Collection of case studies is a supplement to the textbook "Financial analysis". Its aim is the formation of students ' practical skills of analysis, selection and evaluation of analytical information to implement effective economic policies of business entity, for the preparation and adoption of reasonable management decisions, planning and monitoring.

            The book is for bachelors, masters, listeners of courses of improvement of qualification, including the second higher and distance education, as well as all future and practicing business analysts.


    © N. Kazakova
    © I. Dun
    © M. Bobkova
    All rights reserved


ISBN 978-965-567-011-0

CONTENTS


    Preface................................................................ 4
     1. Information sources and methods used in financial analysis............................................................... 6
     2. Diagnostics of the condition and development of businesses............................................................ 11
     3. Financial analysis of sales and costs of production and sale of products (services)............................................................ 15
     4. Methods of analysis of efficiency of functioning of the company............................................................... 19
     5.  Analysis of sources of financing economic activity and business development                                                                          24
     6. Financial analysis in the system of controlling of the business stability............................................................. 31
7.  Analysis of cash flows and company's solvency...................... 37
     8. Analysis of the financial condition of the borrower, and the assessment of his
       creditworthiness................................................... 41
     9. Financial analysis in the assessment of probability of bankruptcy............................................................ 50

PREFACE

           In the context of growing international integration and increased competition, the need for professionalism in economics, management, education, science becomes clear. The reform of management system of economic agents, transition to international standards in accounting, auditing, monitoring and management of business processes require innovations in higher education.
           In government and departmental documents of the Russian Federation on the reform of business management is noted that the most important component of their fiscal policy should be "analysis of financial and economic state of economic entities with consideration of the strategic objectives, adequate to market conditions, and finding ways to achieve them". Therefore, federal state educational standards of higher education set the goal of formation of the readiness of future personnel in the sphere of economics and management for analytical work, capable to select and consolidate the necessary information, perform deep financial analysis of economic activities and justify the tactical and strategic actions of the company.
           Nowadays the analysis can be called a philosophy of management decisions. It is a logical dialectical approach to business management based on the evaluation of transparent and relevant information using formal analytical procedures and informal methods of research, and taking into account the patterns of development of economic processes. Financial analysis is deservedly considered as a tool of scientific cognition and practical study of the processes of functioning and development of economic entities.
           Modern economists, managers, marketers should possess professional methodology of financial analysis, because any business begins with investing money, continues through the movement of money and ends with results that have monetary value. Financial analysis performs creative functions in business management, studying and assessing information on the use of economic resources and financial results, helping to establish links between indicators and business processes, ensuring correct understanding of business development, identifying its real capabilities and difficulties preventing its economic growth, which ultimately lead to improved business performance. The results of the financial analysis are the base for the development of business plans of strategic development. System of key financial indicators provides controlling of financial sustainability of the business, acts as an indicator of an optimality of structure of sources of financing and the financial environment of economic entity, controlling the availability of reserves of financial strength and development of the economic potential of the company.
           At the same time, I would like to emphasize that even the most complex analysis cannot guarantee the only right decision. Analytical justification is always relative to the accepted system of criteria and the limits of the available

information. Therefore, the most successful analyst will be not the one who knows many methods of analysis, but the one who is able to apply analytical tools consciously, depending on the situation, availability and quality of information, specifics of the analyzed object, objective analysis, applying critical approach to the obtained results.
           Collection of case studies is a supplement to textbooks on discipline "Financial analysis". Its aim is the formation of students ' practical skills of analysis, selection and evaluation of analytical information to implement effective economic policies of business entity, for the preparation and adoption of reasonable management decisions, planning and monitoring.


           Best wishes for future analysts,

           Natalya Kazakova

1. INFORMATION SOURCES AND METHODS USED IN FINANCIAL ANALYSIS

          Solving a case on this topic requires knowledge on the formation of the information base for financial analysis, as well as ability to identify financial indicators and determining factors in the management system, mastering skills for practical application of accounting, statistical, econometric and qualitative methods of analysis.

          JSC "Fashion and Design” was established in 2006, on the basis of the reorganization of the pre-existing business. The trademark was registered in 2007. Profile of activities — engineering, design, modeling, development, manufacture and distribution of textiles, clothing.
          The concept of the trade mark of the company is quality clothing and underwear for family shopping. Model "Fashion and design" is a reflection of bold design ideas, the latest trends and fashion. Twice a year the company develops new collections: autumn-winter and spring-summer. Share capital is 99 694 thousand rubles, divided into 900 499 ordinary shares and 96 441 preferred shares with a nominal value of 100 rubles per share.
          The company conducts its business activities in several regions of the Russian Federation: business is divided in accordance with the accounting policies in four operating segments, corresponding to the product range. Table 1 presents the main economic indicators of the company and its immediate surroundings.


Table 1

Main economic indicators of JSC "Fashion and Design"

                                                                                 The       
Indicators                                                 Previous period reporting period
Revenues (the amount of products sold), mln. rub.              10 563           11 010     
Variable cost of goods sold, mln. rub.                          7 296           8 029      
Costs on ordinary activities (commercial products), total;      8 087           8 910      
Including                                                                                  
- labour costs and charges, mln rubles.                         1 311           1 541      
- material costs, mln rubles.                                   6 075           6 539      
- depreciation of fixed assets and intangible assets             177       211             
- other direct costs                                             524             619       
Fixed costs, mln. rub., total;                                   791             881       
Including                                                                                  

The       
                      Indicators                        Previous period reporting period
commercial expenses, mln. rub.                                171             215       
management costs, mln. rub.                                   620             666       
Profit from sales, mln. rub.                                 2 476            2100      
Profit before tax                                            2 032           4 260      
Net income, mln. rub.                                        1 639           3 430      
Property of organization, total                              8 771           11 955     
Fixed assets, mln. rub.:                                                                
- on the initial (replacement) value                         5 425      5 859           
- residual value (according to the balance sheet)            2 445           2 668      
- leased                                                     1 690           7 524      
- leased and on conservation                                  633             630       
- depreciation of fixed assets, mln. rub.                    2 980           3 191      
- fixed assets received during the year, mln. rub.            300             501       
- fixed assets retired over the year, mln. rub.               78               68       
Current assets total, mln. rub.                              3 351      5 220           
Current costs (stocks and short-term receivables)            2 423      3 563           
million. rub.                                                                           
Stocks, mln. rub.                                             995       1 504           
The number of personnel, person.                              916             868       
Owned capital, mln. rub.                                     6 940           6 938      
Undistributed profits (uncovered loss) mln. rub.             5 073           5 419      
Credits mln. rub.                                            1 107           1 824      
Short-term liabilities, total                                1 167           3 855      
- short-term accounts payable, mln. rub.                      724            3 193      
The average rate on credit resources,%                        17               20       
Inflation rate,%                                               8               12       
Producer price indices for industry,%                          7               8        
The average producer price indices of raw materials,          10               15       
components, utilities,%                                                                 
The consumer price index,%                                     9               11       
The average wage growth rate,%                                 5               10       
Multiplier "capitalization (net assets) to realization"      0.65             0.63      
Multiplier "capitalization (net assets) to profit"            4.2              2        

In Russia the share of light industry is less than 1% of GDP, and the products of Russian production takes only 30-40% of the textile market, 60-70% is the leading foreign manufacturers. The leading supplier countries: Italy, Germany, Holland, England, Korea, Turkey, India and China. Among the textile manufactures significant export potential has the production of linen that can be explained by high foreign demand for linen fabrics and a good combination of price and quality of the fabrics produced in Russia. The largest volume of production of fabrics has cotton fabric (about 80%).
        Textile production in comparison with other branches of light the industry has a high level of concentration. The level of concentration is particularly high in the production of silk fabrics and non-woven materials (percentage of three companies-leaders is more than 50%).
        The projected growth rate of demand for textile products in the next two years is about 6-7% per year, while the volume of retail trade textile products will reach 15 billion USD. Growth of consumer demand for textile products gives the growth potential for the Russian production. Therefore, the macroeconomic situation is favorable for the company both in the country and region where it operates. The data characterizing the growth of consumption of products of textile industry in the domestic market reflects the volatility of demand, but over the past five years growth rates are above the average growth rate of GDP (table 2).


Table 2

The dynamics of consumption the textile industry in the domestic market

             The growth rate of consumption of products, %            The  
 Market                                  prior the                  average
segment  previous period previous period previous  previous report- rate of
               -2              -1         period    period  period  growth 
Women's                                                                    
Clothing       90               8           -7        -6       8      14   
Men's                                                                      
knitwear       57              10           21       141       3      20   
Baby                                                                       
Goods          25              12           -24       12      -12      8   
Sports                                                                     
Clothing       102              5           -34       28      -26      6   

        The concentration on the markets for the products of women's clothes, baby goods and sportswear is reduced, according to this the intensity of competition increases, while the degree of concentration in the market of men's knitwear increases. In general, sportswear market is characterized by the maximum concentration. The number and composition of sellers in the markets don't change, and it indirectly characterizes the entrance barriers to the market as insurmountable, that also has a positive effect on the company's operations and other sellers operating in these markets.

The company's market share in the markets of products of women's clothing and men's knitwear is declining and remains relatively constant in the markets of baby goods and sportswear (table 3). This is seen as a negative factor and indicates the loss of its positions in the most attractive markets.


Table 3

The dynamics of the market share of JSC "Fashion and design" in sales

                          The company's market share in sales,%             
Market segment   prior to the previous                                     
                        period         previous period The reporting period
Women's clothing          32                 24                 23         
Men's knitwear            13                 10                 8          
Baby goods                 5                  5                 5          
Sports clothing            4                  5                 4          

       Thus, market environment of JSC "Fashion and design" is characterized by positive trends in macroeconomic, regional and sectoral climate and negative processes that are associated with an increased investment activity of competitors. As a result, there is a process of reducing of the company's market position in the markets of women's clothing and men's knitwear. The high dependency of the company from one supplier, whose share is growing and approaching 70% ,is evaluated as negative. At the same time investment processes in the industry contribute to the growth of production capacity, growing demand for products creates preconditions for increase of business efficiency.

     Task 1. What are the sources of information that were used to compile analytical note. What methods and techniques of analysis were used for its compilation?

     Task 2. On the basis of information about the company make a general brief characteristic of business. What are the main criteria of assignment the company to a certain group of economic agents?

     Task 3. Analyze aggregated comparative analytical balance and profit and loss account by filling in the table 4 .


Table 4

Aggregated comparative analytical balance and profit and loss account

            Previous (base)     The reporting                        
Indicators      period             period        Absolute deviation  
            amount,  Specific  amount,  Specific  amount,  Specific 
           mln. rub. weight,% mln. rub. weight,% mln. rub. weight,%