TOOL E6
This tool provides you with questions to help you assess the sustainability of profits in a business model by analysing the main components of the income statement.
| Income statement format | Questions |
|---|---|
| SALES/REVENUE -Cost of goods sold(COGS) | Are operating leases (off B/S) a significant cost in COGS or SG&A? |
| GROSS PROFIT (GP) | Core Operational Performance • External factors • Management |
| – Selling, General, Administrative Expenses (SG&A) | Is there good expenses management? Are items correctly allocated above and below GP & EBIT? |
| – Other Operating Expenses (Provisions) EARNINGS BEFORE INTEREST AND TAX (EBIT) | How do the issues associated with those provisions se events impact on a company’s risk profile? |
| – Gross Finance costs | Is the operational efficiency sufficient for its funding structure? |
| – Tax | |
| -/+ Associates/Joint ventures | What is the quality of earnings from associates and JVs? Is it cash or non cash? Are there hidden liabilities associated with these investments? |
| -/+ Discontinued Operations | Impact on continuing operations? |
| – Minority interests Net Profit | Have Minority Interests led to an inflation of sales growth and/or EBIT(DA)? |
| – Dividends RETAINED EARNINGS | Is the balance reasonable between dividend payout and retained profits? |
Notes
• Be aware of the impact of accounting policies on
– Consolidation
– Revenue recognition
– Inventory/WIP valuation
– Provisioning
– Depreciation/ amortisation
• Depreciation and amortisation from COGS and SG&A are added back to EBIT for EBITDA which is a core part BUT NOT EQUAL TO operational cash flow
• Are there any non- recurring items or fair value adjustments affecting trends in EBIT(DA)
• Compare reported and sustainable EBIT(DA)
