Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

MID 16 INTERNATIONAL FINANCIAL STATEMENT ANALYSIS

EXERCISES

Exercise 1: Albert

In year N, Mr. Albert, an architect, opened a firm with equipment worth 200,000 (all amounts
in €). The firm employs one employee. For transactions made during year N, the following
four hypotheses have been made:

For each hypothesis, show the balance sheet N and compare cash and net income.

Net income= Revenue- Expenses

Cash = net income at a special time

Hypothesis 1:
- Miscellaneous expenses: 100,000 cash payment
- Salary of employee: 24,000 cash payment
- Projects sold/delivered to clients: 180,000 cash payment

H1
Net income or profit = 180-100-24=56
Cash= 180-100-24=56

Balance Sheet

Asset Liability
Equip 200 Share Capital 200
Cash 56 Net income or profit 56

Hypothesis 2:
- Miscellaneous expenses: 100,000 cash payment
- Salary of employee: 24,000 cash payment
- Projects sold/delivered to clients: 180,000 payment in N+1

H2
Profit = 180-100-24=56
Cash= -124

Balance Sheet

Asset Liabilities
Equip 200 Share Capital 200
Account receivable 180 Net income or profit 56
Overdraft 124

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Hypothesis 3:
- Miscellaneous expenses: 100,000 payment in N+1
- Salary of employee: 24,000 cash payment
- Projects sold/delivered to clients: 110,000 cash payment

H3
Net income Profit 110- 100-24 = -14
Cash 110- 24= 86

Balance Sheet

Asset
Equip 200 Share Capital 200
Cash 86 Net income/ Profit -14
AP 100

Hypothesis 4:
- Miscellaneous expenses: 100,000 cash payment
- Salary of employee: 24,000 cash payment
- Projects sold/delivered to clients: 110,000 payment in N+1

H4
Net income 110-100-24= -14
Cash= -100-24= -124

Balance Sheet

Asset Liabilities
Equip 200 Shared Capital 200
Account receivable-124 Net income -14
Overdraft 110

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Exercise 2: Operating cash flow (indirect method)

The current sections of Scoggin Inc.’s balance sheets at December 31, 2019 and 2020, are
presented here. Scoggin’s net income for 2020 was $153,000. Depreciation expense was
$24,000.

Step 1 Calculate income (revenue-expenses)

Step 2 Add Back Any Non-Cash Expenses (amortization/ depreciation)

Step 3 Account for Changes in Current Assets and Liabilities

- For assets: Add back decreases to your current assets and subtract any
increases
- For liabilities:Add any increase in your current liability accounts and subtract
any decreases.

- Prepare the operating activities section—indirect method.

2020 2019
Current assets
Cash $105,000 $ 99,000
Accounts receivable 110,000 89,000
Inventory 158,000 172,000
Prepaid expenses 27,000 22,000
Total current assets $400,000 $382,000
Current liabilities
Accrued expenses payable $ 15,000 $ 5,000
Accounts payable 85,000 92,000
Total current liabilities $100,000 $ 97,000
Prepare the net cash provided by operating activities section of the company’s statement of
cash flows for the year ended December 31, 2020, using the indirect method.
Net income 153 000$
+ Depreciation expense 24,000$
Change A.R - 21,000$
Change Inventory +14,000$
Change Prepaid expenses – 5,000$
Change Account exp +10,000
Change A.P -7,000$
= OPCF= 168,000$

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Exercise 3 Operating cash flow (indirect method)

The following information is available for Stamos Corporation for the year ended December
31, 2020.

Beginning cash balance $ 45,000

Accounts payable decrease 3,700
Depreciation expense 162,000
Accounts receivable increase 8,200
Inventory increase 11,000
Net income 284,100
Cash received for sale of land at book 35,000
value
Cash dividends paid 12,000
Income taxes payable increase 4,700
Cash used to purchase building 289,000
Cash used to purchase treasury stock 26,000
Cash received from issuing bonds 200,000
Prepare the cash flow statement of Stamos Corporation for the year ended December 31,
2020, using the indirect method for operating cash flow.

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Exercise 4: Cash flow statement

Here are comparative balance sheets for Velo Company.

Velo Company
Comparative Balance Sheets
December 31
Assets 2020 2019
Cash $ 63,000 $ 22,000
Accounts receivable 85,000 76,000
Inventory 170,000 189,000
Land 75,000 100,000
Equipment 270,000 200,000
Accumulated depreciation—equipment (66,000) (32,000)
Total $597,000 $555,000
Liabilities and Stockholders' Equity
Accounts payable $ 39,000 $ 47,000
Bonds payable 150,000 200,000
Common stock ($1 par) 216,000 174,000
Retained earnings 192,000 134,000
Total $597,000 $555,000
- Additional information:
1. Net income for 2020 was $93,000.
2. Cash dividends of $35,000 were declared and paid.
3. Bonds payable amounting to $50,000 were redeemed for cash $50,000.
4. Common stock was issued for $42,000 cash.
5. No equipment was sold during 2020, but land was sold at cost.

Prepare the statement of cash flows for the year ended December 31, 2020, using the
indirect method for operating cash flow.

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Exercise 5: Who is who n° 1

You will find in the appendix the balance sheets and income statements of 5 European
groups at the end of 2015 (A, B, C, D, E). For the sake of simplicity, the various balance
sheet items are expressed as a percentage of the balance sheet total and the income
statement items as a percentage of sales. Income statements are presented by nature. You
must find out who is who and provide at least 3 clues for each group that allowed you to
identify them.
Each balance sheet and income statement corresponds to one of the following companies:

Savencia
Savencia (formerly Bongrain) is the 2nd largest French cheese group. It produces and
markets cheese specialities under the following brands: Tartare, Saint-Morey, Elle & Vire,
Saint-Agur, Caprice des Dieux...
The group was founded in the 1960s, created its own brands (Tartare...) but also acquired
several companies in France and abroad, notably in 1992 the cooperative UNL, owner of
the Elle & Vire brand.

Olympique Lyonnais
Olympique Lyonnais is a French football club listed on the stock exchange. To attract quality
players, the group has to pay high salaries. They must also pay transfer fees to former
clubs of the players they recruit. These costs are considered intangible assets to be
amortised over the term of the contract signed with the players (from 3 to 5 years). Amounts
remaining to be collected or paid on player transfers are recorded in Other non-current or
current assets/liabilities depending on the maturity date. The year 2015 was marked by the
following events:
● OL has sold 11 players to other clubs on which it has realised significant capital
gains.
● OL has become the owner of the new Grand Stadium, which now hosts home
games for its team. In order to finance this stadium, the OL has been heavily
indebted.

Groupe Air-France KLM

The Air-France KLM group is a European leader in passenger transport. It operates
approximately 600 aircraft of all the airlines composing the group (Air-France, KLM,
Transavia, etc.). The cost of fuel used for aircraft represents a significant portion of the
Group's expenses. Several of the group subsidiaries (particularly KLM in the Netherlands)
pay pensions to their retired employees. Customers buy and pay for their air tickets usually
before the actual flight. To finance the acquisition of its aircraft, the Group regularly
issues bonds. The group has had several difficult years.

Groupe Inditex
Inditex is a Spanish group that markets textile products worldwide in its 7,000 shops under
brands developed in-house: Zara, Pull&Bear, Massimo Dutti...
The group owns part of its shops and the other part is rented. The group does not have
factories, it buys the products from subcontractors. The group has very little debt.

Groupe Orange
Orange is one of Europe’s leading telecommunications operators. Over the past 20 years,
the group has made numerous acquisitions of foreign companies, including the British
company Orange in 2000. The group owns networks and leases them to other
telecommunications operators. The Group regularly issues bonds to finance its growth.

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

The group subcontracts part of its IT development and maintenance to external service
providers. It devotes significant amounts to advertising and promotion operations.

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Simplified Balance Sheets at 31/12/2015

A B C D E
ASSETS
Non-Current Assets
Goodwill 1% 30% 9% 0% 1%
Intangible assets 4% 16% 5% 5% 4%
Plant, property and equipment 45% 34% 28% 70% 38%
Investments in equity-accounted
investments 1% 0% 4% 0% 1%
Other non-current financial assets 13% 2% 2% 0% 3%
Other non-current assets 4% 3% 1% 2% 4%

CURRENT ASSETS
Inventories 2% 1% 14% 0% 13%
Accounts receivable 8% 5% 25% 8% 4%
Current financial assets 4% 2% 1% 0% 7%
Other current assets 5% 3% 1% 8% 1%
Cash 13% 5% 12% 5% 24%

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TOTAL ASSETS 100% % 100% 100% 100%

EQUITY & LIABILITIES

EQUITY 1% 36% 40% 24% 66%

NON CURRENT LIABILITIES

Long term financial debt 30% 33% 6% 50% 5%
Long term provisions 15% 4% 4% 0% 1%
Other noncurrent liabilities 2% 3% 2% 5% 2%

CURRENT LIABILITIES
Short term financial debt 14% 5% 19% 1% 0%
Accounts payable 10% 10% 28% 5% 26%
Short term provisions 3% 3% 0% 0% 0%
Other current liabilities 24% 6% 0% 16% 0%

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TOTAL EQUITY & LIABILITIES 100% % 100% 100% 100%

INCOME STATEMENTS 2015 A B C D E

100,0 100,0
Revenue % 100,0% 100,0% 100,0% %
Cost of raw materials/goods -23,7% 0,0% -64,4% -18,1% -42,2%
External expenses -40,4% -44,0% 0,0% -16,9% -19,1%
Personnel expenses -30,1% -22,4% -18,5% -62,5% -16,2%
Depreciation expenses -6,3% -16,1% -2,7% -14,4% -4,9%
Other operating income (expenses) 4,8% -5,7% -11,8% 28,8% 0,0%
Operating Profit (or loss) 4,3% 11,8% 2,7% 16,9% 17,6%
Financial interest -1,4% -4,0% -0,8% -6,3% -0,1%
Other financial income (expenses) -2,1% 0,0% 0,2% 0,0% 0,1%
Other non-operating income (expenses) -0,1% 0,0% 0,2% 0,0% 0,3%

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Income Tax -0,2% -1,6% -0,9% -4,4% -4,1%

Net Income 0,5% 6,2% 1,4% 6,3% 13,8%

ANSWERS: Indicate below which financial statement corresponds to which company.

Justify your answer by providing 3 clues for each case.

Company A : Air France

Clue 1 : Lot of inventories
Clue 2 : Seconds highest salary
Clue 3 :

Company B : Orange
Clue 1 : External expense - marketing
Clue 2 : Goodwill
Clue 3 : No raw materials

Company C : Savencia
Clue 1 : High personal expense
Clue 2 : High property asset
Clue 3 : No goodwill

Company D :Olympique Lyonnais

Clue 1 : High Personal Expenses
Clue 2 : High property assets (Stade)
Clue 3 :

Company E : Inditex
Clue 1 :
Clue 2 :
Clue 3 :

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Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Exercise 6: Who is who n° 2

On the following pages you find a set of balance sheets and income statements for 6 French
groups at the end of 2011 (A, B, C, D, E, F). For the sake of simplicity, the balance sheet
items are expressed as a % of the balance sheet total and the income statement is given as
a % of revenue. Each balance sheet and income statement corresponds to one of the
following companies:

CARREFOUR
The Carrefour group is the world's second largest retailer. It owns most of the buildings
where its storefronts operate. The group also engages in banking and insurance business
activities through its subsidiary Carrefour Banque, which generates earnings for it. This
activity generates significant client receivables, which are recorded in "Other non-current
assets" or "Other current assets" depending on their maturities. Similarly, the debts
associated with the refinancing of these client receivables are shown in "Other non-current
liabilities" or "Other current liabilities" depending on their maturities.
During the 2000s, the group made numerous acquisitions. In 2011, the group sold off its
business activities in Thailand, as well as the low-cost brand Dia. Goodwill impairments
(mainly in connection with stores in Italy and Greece) were recognized in "Other operating
income and expenses".

MICHELIN
Michelin, founded in 1889 by the Michelin brothers, is an industrial group specializing in the
production of tires. The group's development has essentially resulted from organic growth
(few acquisitions of other companies). The group has a number of factories in the United
States, Canada and the United Kingdom: it has committed to paying pensions (called
"defined benefit" pensions) to employees in these plants. Goods

CAP GEMINI
Founded in 1967 by Serge Kampf, Cap Gemini is one of the world leaders in IT consulting
and services. The Group regularly acquires consulting firms and software engineering firms
in France and abroad. Customers often pay advances against orders, recorded under "Other
current liabilities." Asset

SANOFI-AVENTIS
The Sanofi-Aventis Group is one of the world's leading pharmaceutical companies (the 4 th
biggest in the world in 2011). It was formed from the 2004 merger of the Sanofi and Aventis
corporations. The Group regularly acquires other companies, in particular biotech firms. In
2011, it acquired Genzyme for 14 billion euros. During the acquisitions, the group leverages
the ongoing research and products marketed by the target company. These intangible
assets are then systematically amortized (amortization of intangible assets posted under
"Other operating income and expenses").

PERNOD RICARD
Pernod Ricard is a French group specializing in the manufacture and production of wines
and spirits (the world's 2nd biggest group in the sector in 2011). The Pernod Ricard Group
was created in 1975 by the merger of the two companies Pernod SA and Ricard SA. Since
then, the group has conducted numerous acquisitions of companies which have enabled it to
obtain a large portfolio of brands (Ricard, Pernod, Pastis 51, Suze, Dubonnet, Chivas
Regal, Ballantine's, Absolut, etc.) Goodwill

PSA PEUGEOT CITROEN

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

PSA is a French carmaker. PSA has experienced recurring difficulties since 2008 and its
profitability in 2011 is very low. The accounts shown are for industrial activity only. Vehicle
development costs are recorded as intangible assets and amortized over a maximum
period of 7 years. PSA sells vehicles to rent-a-car companies (AVIS, EUROPCAR etc.) that
are usually accompanied by a buy-back clause. The buy-back undertakings are recorded
under "Other non-current liabilities."

Find out who companies A, B, C, D, E and F are.

Balance sheets at 31/12/2011

ASSETS

NON CURRENT ASSETS A

Goodwill 38%
Intangible assets 24%
EQUITY & LIABILITIES A

EQUITY 56%

NON CURRENT LIABILITIES

Income Statements for 2011 (% of revenue)

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Income Statements A

Revenue 100.0%
Other operating income 0.0%
Cost of sales -32.7%

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

ANSWERS: Indicate below which financial statement corresponds to which company.

Justify your answer by providing 3 clues for each case.

Company A :
Clue 1 :
Clue 2 :
Clue 3 :

Company B :
Clue 1 :
Clue 2 :
Clue 3 :

Company C :
Clue 1 :
Clue 2 :
Clue 3 :

Company D :
Clue 1 :
Clue 2 :
Clue 3 :

Company E :
Clue 1 :
Clue 2 :
Clue 3 :

Company F :
Clue 1 :
Clue 2 :
Clue 3 :

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Exercise 7: ROCE
In the table below you have figures for Company A and B.

Company A Company B
Sales revenue 328,000 90,800
-Cost of sales 295,453 68,654
=Gross profit 32,547 22,146
-Selling & administrative expenses 25,480 17,812
=Profit before fin result 7,067 4,334
-Financial expenses 104 84
=Profit before tax 6,963 4,250
-Income tax expense (25%) 1,741 1,063
=Net income 5,222 3,187

Capital employed 66,250 40,625

a) Calculate ROCE (after tax; based on year-end capital employed) for both companies.

ROCE = NOPAT/ Capital Employed

A (ROCE) 7,067*-(7,067*0,25)/ 66, 250 = 8%

B (ROCE) 4,334*-(4,334*0,25)/ 40, 625 = 8%

b) Comment the results of a). Explain if the numbers indicate that the 2 companies pursue
different strategies.

A= 7,067* 25% / 328, 000 * 328, 000/66,250 = 1.6 (operating profit margin) * 4,95 = 8%

Volume strategy

B= 3,6 * 2,3.. = 8%

Margin Strategy

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

Exercise 8: ROCE
Turino Inc. realised an investment for 250,000€ in year N which was entirely financed with
new debt. Below are shown the balance sheet and income statement for the years N and N-
1.
a) Calculate ROCE (after tax; tax rate: 40%)
b) Calculate the debt/equity ratio for 31 December N-1 and N.
c) Calculate ROE for the years N-1 and N.
d) Explain the change of ROE N compared to N-1.

Balance sheet 31 December

N N-1 N N-1

Non-current assets 860,000 735,000 Share capital 450,000 450,000

Inventory 210,000 180,000 Retained earnings 300,000 250,000
Accounts 391,000 232,000 Financial debt 550,000 300,000
receivable
Cash 4,000 5,000 Accounts payable 165,000 152,000
TOTAL 1,465,000 1,152,000 TOTAL 1,465,000 1,152,000

Income statement
N N-1 N N-1
Raw material expense 40,000 48,000 Sales revenue 480,000 345,000
Salary expense 60,000 77,000 Other operating 40,000 37,500
Depreciation expense 125,000 100,000 revenue
Interest expense 55,000 30,000
Income tax expense 96,000 51,000
PROFIT 144,000 76,500
TOTAL 520,000 382,500 520,000 382,500

Exercise 9: Equity
Following is presented the equity section of Airbus’ balance sheet for the year-ends 2021
and 2020.

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

By using primarily the annual report 2022 of Airbus but also other internet sources if
necessary, answer the following questions

a) What is the par value of Airbus shares?

b) How many new shares have been issued in 2022, and why?

c) What is the (average) selling/issue price of the new shares? Compare this price to the
market price of Airbus shares in 2022.

d) How many of its own shares did Airbus buy back or sell in 2022? For how much? What is
the average price of the shares bought back? Compare to the market price.

Exercise 10: Debt vs. equity

Moby Inc. is considering two alternatives to finance its construction of a new €2 million plant.
- Issuance of 200,000 shares of common stock at the market price of €10 per share.
- Issuance of €2 million, 8% bonds at face value.

Complete the following table, and indicate which alternative is preferable.

Issue Stock Issue Bond
Income before interest and €700,000 €700,000
taxes
Interest expense from bonds 0 160000
Income before income taxes 700000 540000
Income tax expense (30%) 210000 162000
Net income 490 378
Outstanding shares 500,000
Earnings per share

Exercise 11: Capital structure

To finance a new investment for €10 million a company wishes to raise this amount with
external financing by issuing
- either ordinary shares at a 10% discount on the current share price, or
- a 12% bank loan.

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 Christopher Hossfeld, ESCP Business School, MSc IBD Intl Fin Statement Analysis 2024

The current share price is 3.50€.

Forecasted income statement excl. the new investment (in 000’s)

Sales revenue 45,320
Operating profit 11,170
Interest expense 2,280
Profit before tax 8,890
Tax expense (35%) 3,112
Earnings available to ordinary shareholders 5,778
Dividend 3,467
Retained earnings forecasted year 2,311

Forecasted balance sheet excl. the new investment (in 000’s)

Non-current assets (net) 24,260
Current assets 28,130
TOTAL ASSETS 52,390

Current liabilities* 18,370

13% financial debt 12,000
Equity 22,020
TOTAL LIABILITIES & EQUITY 52,390
*Including a bank overdraft of € 6 million

Equity details
Ordinary shares (0.5 € par value) 5,000
Share premium 4,960
Total retained earnings 12,060
Total equity 22,020

Which of the two financing sources should the company use? Decide by looking at Earnings
Per Share (EPS) and the debt/equity ratio.

Additional info 1: Assume that the new investment generates a return (pre-tax ROCE) equal
to the current return. Assume that dividends per share remain the same.

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