For this series of quizzes on key financial analysis indicators, Alain Luminel, head of the financial analysis division at Ellisphere, details the important concepts to know when analyzing the financial health of a company.
Part 1: Gross Operating Income (GOI)
The EBITDA of a company, also called gross operating profit, is an intermediate management balance.
Today, there are nearly 200 ratios used in credit and financial analysis. In the current context of the health crisis, most of these ratios are counterproductive because they are not intuitive enough. Indeed, they are not adapted to the unprecedented situation we are currently experiencing. It is urgent to refocus on the fundamentals.
For example, the strength ratios inherent in the financial structure, the liquidity ratios because the decline in the amount of receivables will reduce cash flow, and the cash-related ratios because the decline in sales threatens the profitability of companies.
Monitoring the gross operating margin (EBITDA / sales before tax), a true cash marker, is becoming essential in this economically difficult period.
Expert's view: what is gross operating surplus?
Part 2: Working Capital Requirement (WCR)
For this second meeting related to the key indicators of financial analysis, Alain Luminel focuses this time on the Working Capital Requirement also called WCR.
Revenue growth is not a guarantee of security for a company because it can lead to an uncontrolled increase in its operating needs.
In a context of economic recovery, the analysis of the Working Capital Requirement is a central indicator because it allows us to understand three essential markers necessary for the proper functioning of the company. Its cash flow, its profitability and the efficiency of its organization.
Part 3: Cash flow of a company
Cash flow is an essential indicator in the life of a company. Cash flow is in fact fed by incoming and outgoing flows. Cash flow from operations is by far the most important. Its level will determine the company's ability to invest and develop its margins and thus to sustain its activity.
