Financial statement analysis - Appunti completi (2025-2026)

Ratio analysis

Ratio analysis is carried out to evaluate a company’s financial performance and position by comparing relationships among different financial statement figures. Ratios are performance metrics that can be categorized into 4 clusters based on the specific aspect measured:

• Efficiency: How well a company uses its assets
• Financial strength: Evaluate the company’s long-term stability, debt capacity, and capital structure. In other words, how strong or resilient the company is financially.
• Profitability: How efficiently the company generates profit relative to sales, assets, or equity.
• Investments: Only for listed companies, performance of traded shares on the market

When analyzing a set of financial statements, it might happen that costs are displayed in different ways. In the Anglo-Saxon world, costs are categorized by function: they’re grouped based on the function that they contribute to (ex. COGS, Marketing, R&D, Sales, Finance…). In this case, COGS are seen as manufacturing costs, meaning all the expenses that were borne in order to create finished goods.

In the rest of the world, costs are presented by nature, meaning that they appear based on the specific activity that has caused them (ex. Personnel costs, Raw material costs, Shipping costs). To move from a natural classification to a functional one, it must be understood where nature crosses the function.

COGS, expressed in the functional classification, are given by many (ex. voices in the classification by nature, like raw materials costs, part of cost of services, part of cost of personnel… All the activities that contribute to the manufacturing of goods, which are separately displayed in a classification by nature, are aggregated into COGS in a functional one.)

Efficiency ratios

Inventory turnover

Inventory turnover =

This ratio provides how fast the company turns (replaces) its inventory over a year. For this ratio the higher the better: goods are being sold quickly so there are less costs related to idle inventory. This measure however has 2 major problems:

• Inventory also considers raw materials and work in progress, so the measure could be incorrect. To be precise, we would have to isolate only the portion of inventory corresponding to finished goods.
• COGS could be estimated wrongly based on which costs by nature are considered to calculate them.

If COGS decrease, then the inventory turnover decreases as well: the company is less efficient. If we want the amount of days necessary in order to fully sell and replace inventory, we have to compute the days inventory outstanding (DIO):

365 =

Ex) In the example, Brunello Cucinelli has an inventory turnover of 127 days, which is appropriate for a high fashion company. If we were considering a fast fashion retailer, the ratio would be around 7 days.

Asset turnover

This ratio tells how long it takes for a company to recover the value of its total assets through its revenues.

=

Ex) In a year Brunello Cucinelli is not able to recover the value of its invested assets (meaning the ones that he employed to generate the revenues) through revenues. The asset turnover is 0,74. This is typical of luxury companies because their main goal is not efficiency, but profitability and high margins. Retailer companies, with no big offices or assets, have very high values, while the lowest values can be recorded by banks. They indeed have lots of loans, which are assets, in order to generate interest.

Accounts receivable turnover

It measures how many times per year a company collects its average accounts receivable.

= /

We can also compute the DSO (days sales outstanding)

365 =

Ex) For Brunello Cucinelli we expect quite a small turnover because it mainly carries out business through directly operated stores. The