Economics
Analysing an annual statement / income statement
Key figures:
– Capital Ratios
Equity Ratio: 𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
➔ Percentage, of how much of the total capital is equity
➔ Higher percentage results in more independence from credits, low interest rates to pay
and a more stable company in general
Debt Ratio: 𝐷𝑒𝑏𝑡
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
➔ Percentage, of how much of the total capital is debt (=100% – Equity ratio)
Leverage: 𝐷𝑒𝑏𝑡
𝐸𝑞𝑢𝑖𝑡𝑦
➔ High quota shows, the company finances his results with a high debt
➔ Quota over 2.0 (200%) is considered risky (not in all businesses, but in general)
– Liquidity
Cash Ratio (liquidity 1. degree): 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
➔ Is the company able to pay current liabilities only with cash/cash equivalents?
➔ Cash Ratio = 1, company is able to pay and therefore more stable
Quick Ratio (liquidity 2. degree): 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠+𝑠ℎ𝑜𝑟𝑡−𝑡𝑒𝑟𝑚 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
➔ Is the company able to pay current liabilities only with cash/cash equivalents and
short-term receivables?
Current Ratio (liquidity 3. degree): 𝑙𝑖𝑞𝑢𝑖𝑑 𝑎𝑠𝑠𝑒𝑡𝑠+𝑠ℎ𝑜𝑟𝑡−𝑡𝑒𝑟𝑚 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠+𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
➔ Is the company able to pay current liabilities with cash/cash equivalents, short-term
receivables and inventories (that they would have to sell then)?
➔ If this ratio is lower than 1, the company is in trouble (possible bankruptcy, definitely
illiquidity)
Working Capital: Inventories + receivables + bank accounts + cash – liabilities
➔ <1: trouble paying back short-term credits, worst case is bankruptcy
➔ >2: company is not investing assets they have (money “lying around”)
➔ Decreasing working capital can be seen as a warning
➔ Increasing working capital can show problems in operating systems of the company
– Revenue analysis
Return on Investment (ROI): 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
➔ How profitable are the investments of a company?
Return on Equity (ROE): 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝐸𝑞𝑢𝑖𝑡𝑦
➔ How much profit can be earned with the money shareholders invested?
