Research Proposal: Filippo Fochi SPA

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FINANCIAL ANALYSIS - Filippo Fochi SPA

Financial highlights

Income statement data

Group Revenues

Group Net earnings

FFC Revenues

FFS Net earnings

Balance sheet data

Group Total assets

Group Debt

Group Shareholders' equity

FFS Total assets

FFS Debt

FFS Shareholders' equity

Group Net profit margin (%)

Group EBIT

Group debt-to-equity ratio

FFS Net profit margin (%)

FFS EBIT

FFS debt-to-equity ratio

Filippo Fochi SpA - case No. 001/04 and author's own calculations from the same document

Total assets = Total liabilities; Total liabilities = Total debt + Shareholders' equity

Financial analysis and the results of operations

FILIPPO FOCHI GROUP INCOME STATEMENT 1989-1992 (MILLIONS of LIRA)

Items

Revenues

Cost of sales

Gross profit

Sales and administrative expenses

Depreciation

EBIT (Earnings before interest & taxes)

Interest expense

Interest income

Other extraordinary items

EBT (Earnings before taxes)

Taxes

EAT (Earnings after taxes)

Gains/losses from discontinued operations

Gains/losses on extraordinary items

Income from subsidiaries

Net earnings

Source: Filippo Fochi SpA - case No. 001/04

TABLE 2 - FILIPPO FOCHI SPA INCOME STATEMENT 1989-1992 (MILLIONS of LIRA)

Items

Revenues

Cost of sales

Gross profit

Sales and administrative expenses

Depreciation

EBIT (Earnings before interest & taxes)

Interest expense

Interest income

Other extraordinary items

EBT (Earnings before taxes)

Taxes

EAT (Earnings after taxes)

Gains/losses from discontinued operations

Gains/losses on extraordinary items

Income from subsidiaries

Net earnings

Source: Filippo Fochi SpA - case No. 001/04

Revenues

The group's revenues increased 313% from

352,117 millions to

1,455,840 millions between 1989 and 1992 with an average growth of 78%/year. The growth was primarily attributable to:

The company's policy of integrated production

The acquisition of existing companies, which were added to those already part of the group

The rationalization of the organizational structure meant to transform Filippo Fochi SpA into a pure holding company with the ability to spin off areas within.

Filippo Fochi SpA's (FFS) revenues increased 172% from

263,806 millions to

718,409 between 1989 and 1992 with an average growth of 43%/year. FFS's revenues increased slower than the group's revenues as the market abroad were more dynamic than the domestic one, especially the Middle East.

Cost of sales

The cost of sales increased slower than the revenues with 217% from

84,260 millions to

266,707 millions between 1989 and 1992 with an average growth of 54%/year. This suggests that the company achieved cost efficiency as it increased its size, probably due to economies of scale and scope.

The typical cost of sales related to construction activity includes:

Purchase of raw materials

Operational costs related to the construction of various objectives, such as consumable materials, personnel and third party services

FFS's cost of sales decreased 24% over the period analyzed with an average of 6%/year. The company managed to increased cost of sales efficiency by reducing the costs and still increasing the revenues from one year to another.

Gross Profit

The gross profit grew 350% from 1989 to 1992 with an average of 86%/year. The growth rate was superior to both that of revenues and the cost of sales as during this period the latter reduced its size as % of the former. Thus, in 1989 the cost of sales represented 24% of the revenues and 3 years later in 1992 the percentage was reduced to 18%. One of the reasons behind gross profit evolution is the increased efficiency of the cost of sales.

FFS's gross revenues increased 221% over the 4-year period analyzed with an average of 55%/year. Despite the gross profit increasing faster than the company's revenues, and the company's cost of sales decreasing, FFS's gross profit couldn't increased faster than the group's one due to the slow growth of its revenues.

Sales and administrative expenses

The sales and administrative expenses increased 330% from

226,003 millions to

971,249 millions between 1989 and 1992, faster than many other items in the income statement. The increase is explained by the fact that this item reflect the group's fixed costs, such as permanent personnel costs and given that the group was expanding its operations in this period, the personnel increased proportionally and so did all the components of this income statement item.

FFS's sales and administrative expenses increased 218% over the 4-year period analyzed, with an average of 54%/year. The company's sales and administrative expensed increased slower than those of the group as the company didn't expand its activities in the home market as extensively as the group did abroad.

Depreciation

The depreciation increased faster then the cost of sales and slower than the revenues with 244% from

18,458 millions to

63,644 millions between 1989 and 1992 with an average growth of 61%/year.

The depreciations costs are related to the production assets. The increase was primarily attributable to the increase in production.

FFS's depreciation increased 120% over the 4-year period analyzed, with an average of 30%/year. The company had less investment in the home market than abroad.

EBIT (Earnings before interest & taxes)

The EBIT grew 559% over the 4-year period analyzed with an average growth rate of 140%/year. The growth rate was superior to that of gross profit, sales and administrative expenses and depreciation as the last 2 items reduced their size as % of gross profit, falling from 91% in 1989 to 76% in 1992. This suggests that both sales and administrative expenses and depreciation have increased their efficiency over the analyzed period.

FFS's EBIT increased 321% during 1989-1992 with an average of 80%/year. The sales and administrative expensed and depreciation increased their efficiency for the company as well as they did for the group.

EAT (Earnings after taxes)

The EAT grew 353% over the 4-year period analyzed with an average growth rate of 88% per year. The growth rate was inferior to that of EBIT because the proportion of taxes in this latter item was maintained to roughly 40%.

FFS's EAT increased 219% during 1989-1992 with an average of 55%/year. Again, EAT increased slower than EBIT as the proportion of taxes in this indicator maintained constant to roughly 38%, as it did in the group's case.

Net Earnings

The net earnings increased with 350% from £7,439 millions to

33,493 millions between 1989 and 1992 with an average growth of 88%/year. The evolution of net earnings was similar to that of EAT, as the gains/losses from discontinued operations or on extraordinary items and the income from subsidiaries has an insignificant impact of EAT changes.

The income statement analysis is somewhat limited. Financial analysts tend to focus on "valuation," rather than "historical earnings." The valuation pays respect to expected cash flow, which is different than income. Furthermore, such items as depreciation don't reflect reality as they are calculated based on historical cost of the asset, which is lower to that of a similar product today as a consequence of inflation. Consequently, such items overestimate the actual earnings.

FFS's net earnings had identical evolution with its EAT as the indicators have the same values.

Financial analysis - ratios

Liquidity

This indicator reflects the asset's ability to be converted into cash easily. Short-term liquidity ratios reflect the firm's ability to meet its short-term obligations. Numerically, a ratio higher than #1 would be a positive indicator of liquidity and a lower risk for short-term creditors. The two most common ratios are: current ratio and quick ratio, with ideal values of (2:1) and (1:1)

The current ratio is positive and between 1 and 2 in the 1st year analyzed. In the following 3 years, the ratio has negative values as current liabilities item is negative due to high negative debts to associated companies, which represent loans to associated companies. Based on these values, the group's ability to meet short-term obligations is good.

FFS's ability to meet short-term obligations is good in the first three years and in 1992 the company starts incurring problems in this area.

The quick ratio in the first three years analyzed has values below 1, indicating a reduced ability of the group to meet immediate financial obligations. This ratio shows the group's liquidity by subtracting inventories from current assets. The rationale behind this is that inventories are the least liquid item among current assets and even though they are considered current assets, the group would need a certain period of time to turn them into cash.

FFS's immediate liquidity is within acceptable limits only in 1989, but in the following 3 years, the indicator deteriorated badly to reach 0.11 in the last year.

Debt

Debt ratios reflect the extent to which a company relies on debts to finance its operations and/or investments, and how debt is managed (i.e. debt repayment).

Debt can be beneficial to firms up to a certain extent as it provides tax benefits, allowing them to exploit business opportunities and foster growth.

The most common leverage ratios are: debt-to-equity ratio and debt-to-assets ratio. These express the extent to which a company relays on debts to finance operations/investments.

The debt-to-equity ratio indicates the extent to which the company relies on external debt for its financing.

The debt-to-assets ratio indicates the extent to which the company relies on external debt to… [END OF PREVIEW]

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