Balance Sheet Advisory.

2. Balance Sheet Advisory

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Balance Sheet as at May 31 2023: Consolidated statement of financial position at May 31, 2023 (before result appropriation) Assets (In € thousands) Note May 31, 2023 May 31, 2022 Non-current assets Intangible assets 4.2 14,247 14,063 Property, plant and equipment - owned assets 4.3 50,938 47,660 Property, plant and equipment - right-of-use assets 4.4 154,353 156,855 Deferred tax assets 7.2 8,078 9,490 Investments 4.5 2,031 2,179 Other non-current assets 8.1 5,688 6,174 Total non-current assets 235,335 236,421 Current assets Unbilled services 3.2 139,157 152,252 Trade and other receivables 3.3 253,959 245,421 Cash and cash equivalents 5.2 7,636 23,810 Total current assets 400,752 421,483 Total assets 636,087 657,904 Equity and liabilities (in thousands) Note May 31, 2023 May 31, 2022 Equity (2,836) (2,914) Non-current liabilities Membership capital 5.1 6,475 6,200 Interest-bearing loans and borrowings 5.2 131,952 124,956 Lease liabilities 4.4 130,253 139,737 Provisions 8.2 939 1,574 Deferred tax liabilities 7.2 1,519 1,402 Total non-current liabilities 271,138 273,869 Current liabilities Trade and other payables 3.4 317,201 343,638 Interest-bearing loans and borrowings 5.2 6,833 4,560 Lease liabilities 4.4 42,284 37,751 Provisions 8.2 1,467 1,000 Total current liabilities 367,785 386,949 Total liabilities 638,923 660,818 Total equity and liabilities 636,087 657,904

Based on the balance sheet provided for the dates May 31, 2023, and May 31, 2022, here's an analysis focusing on the key components and changes over the year:

Overview

The total assets decreased from €657,904 thousand in 2022 to €636,087 thousand in 2023, indicating a reduction in the company's overall resources. Similarly, total liabilities and equity decreased from €657,904 thousand to €636,087 thousand in the same period, maintaining the accounting equation balance.

Assets Analysis

1. Non-current assets decreased slightly from €236,421 thousand to €235,335 thousand. Key observations include:

   • A slight increase in intangible assets from €14,063 thousand to €14,247 thousand.
   • An increase in property, plant, and equipment (owned assets) from €47,660 thousand to €50,938 thousand, suggesting capital investment.
   • A decrease in right-of-use assets from €156,855 thousand to €154,353 thousand, which could be due to the depreciation or termination of leases.
   • Deferred tax assets and other non-current assets also saw a decline, indicating changes in tax estimation and a reduction in long-term receivables or investments.

2. Current assets saw a more significant reduction from €421,483 thousand to €400,752 thousand, driven by:

   • A decrease in unbilled services and cash equivalents, which could reflect a slower revenue recognition process or higher cash utilization.

Liabilities and Equity Analysis

1. Equity remained negative, slightly improving from €(2,914) thousand to €(2,836) thousand, which could be concerning as it indicates a retained deficit or accumulated losses.

2. Non-current liabilities marginally decreased from €273,869 thousand to €271,138 thousand, with the main changes being:

   • An increase in interest-bearing loans and borrowings, suggesting new debt or refinancing of existing debt.
   • A decrease in lease liabilities and provisions, possibly due to lease term completions and settlements of long-term obligations.

3. Current liabilities decreased from €386,949 thousand to €367,785 thousand, primarily due to a reduction in trade and other payables, and an increase in short-term borrowings and lease liabilities, which might indicate a shift in the company's short-term financial strategy.

Financial Health Indicators

• The reduction in total assets alongside a slight decrease in total liabilities and equity suggests a contraction in the company's financial scale.
• The continuous negative equity raises concerns about the company's long-term financial sustainability and the need for strategies to improve profitability or capital injection.

IFRS & GAAP Compliance

• The balance sheet structure and the presentation of assets, liabilities, and equity align with both IFRS and GAAP requirements.
• Specific notes (like 4.2, 4.3, 5.2, etc.) likely provide additional details required for full compliance with these accounting standards, including depreciation methods, asset valuation, and liability management.

Next Steps

Would you like to proceed with a detailed ratio analysis to further assess liquidity, solvency, and financial performance? If so, please specify which ratios you are interested in. Alternatively, we can explore other areas of the financial statement.

detailed ratio

To conduct a detailed ratio analysis, we will examine various financial metrics to assess the company's liquidity, solvency, and overall financial performance. Here are the key ratios we can analyze:

1. Liquidity Ratios:

   • Current Ratio: Measures the ability to cover short-term obligations with short-term assets.
   • Quick Ratio: Similar to the current ratio but excludes inventory from assets, providing a stricter sense of liquidity.

2. Solvency Ratios:

   • Debt to Equity Ratio: Indicates the proportion of equity and debt used to finance the company's assets.
   • Interest Coverage Ratio: Assesses the company's ability to meet interest payments.

3. Profitability Ratios:

   • Return on Assets (ROA): Indicates how efficiently the company utilizes its assets to generate profit.
   • Return on Equity (ROE): Measures the profitability relative to shareholders' equity.

Let’s calculate some of these ratios based on the provided balance sheet data:

• Current Ratio = Current Assets / Current Liabilities
• Debt to Equity Ratio = Total Liabilities / Total Equity
• Return on Assets (ROA) = Net Income / Total Assets (assuming Net Income is provided)

Since the net income figure is not provided, we cannot calculate ROA and ROE accurately. However, we can proceed with the available data for the first two ratios.

Let's calculate the Current Ratio and Debt to Equity Ratio for the year ending May 31, 2023.

Based on the balance sheet for the year ending May 31, 2023, the calculated ratios are:

• Current Ratio: 1.09

  • This ratio indicates that the company has €1.09 in current assets for every €1 of current liabilities, suggesting a reasonable short-term financial stability.

• Debt to Equity Ratio: -225.29

  • The negative value here is due to the company's negative equity. Typically, a high debt to equity ratio indicates that a company may be risking financial instability, but in this case, the negative equity significantly impacts the ratio's interpretation. The negative equity suggests that the company has more liabilities than assets, which is a concerning sign of financial health.

These ratios provide insight into the company's financial position. The current ratio suggests adequate liquidity, but the negative equity highlighted by the debt to equity ratio raises concerns about the company's financial structure and long-term sustainability.

Would you like to explore any specific aspects further or need analysis on another part of the financial statements?

chart

The chart displays the balance sheet overview for 2022 and 2023, illustrating the distribution of non-current assets, current assets, equity, non-current liabilities, and current liabilities for each year. It highlights the changes in financial position between the two years, showing a slight decrease in assets and a concerning negative equity position for both years.

Explain me about if there are any flaw in this balance sheet

The balance sheet provided shows several areas that could be considered problematic or areas of concern. Here's a detailed explanation:

1. Negative Equity

• Issue: The equity section shows a negative balance of €(2,836) thousand in 2023 and €(2,914) thousand in 2022.
• Implication: Negative equity indicates that the company’s liabilities exceed its assets, which can be a serious red flag. It suggests that the company has accumulated losses over time or has significant debt that surpasses its total assets. This situation can deter investors and creditors, as it implies financial instability and potential solvency issues.

2. High Debt Levels

• Issue: The company has substantial non-current and current liabilities totaling €638,923 thousand in 2023 and €660,818 thousand in 2022.
• Implication: The high level of liabilities, particularly when compared to the company's assets, indicates a heavy reliance on debt financing. The Debt to Equity Ratio calculation resulted in a negative and extremely high number due to negative equity, emphasizing the financial risk associated with the company's debt levels.

3. Decline in Current Assets

• Issue: Current assets decreased from €421,483 thousand in 2022 to €400,752 thousand in 2023.
• Implication: A reduction in current assets, particularly cash and cash equivalents, can indicate liquidity issues. The company may face difficulties meeting its short-term obligations, which is supported by the Current Ratio of 1.09, only slightly above 1, suggesting tight liquidity.

4. Lease Liabilities

• Issue: The company has significant lease liabilities, both current (€42,284 thousand in 2023) and non-current (€130,253 thousand in 2023).
• Implication: High lease liabilities can burden the company with fixed obligations, reducing financial flexibility. While leasing can be a strategic choice, such high amounts relative to other financial metrics need careful management to avoid cash flow problems.

5. Deferred Tax Assets and Liabilities

• Issue: There is a decrease in deferred tax assets from €9,490 thousand in 2022 to €8,078 thousand in 2023, alongside deferred tax liabilities of €1,519 thousand in 2023.
• Implication: Deferred tax assets and liabilities need to be monitored for changes in tax regulation and company profitability. A decrease in deferred tax assets may indicate that the company expects lower future taxable income, which can affect long-term financial planning.

Areas for Improvement

1. Equity Injection: To address the negative equity, the company may need an injection of capital, either through equity financing (issuing new shares) or through retained earnings (improving profitability and retaining profits).

2. Debt Management: Reducing debt through refinancing, debt restructuring, or using cash flow to pay down liabilities can help improve the debt to equity ratio and overall financial stability.

3. Liquidity Improvement: Enhancing liquidity by managing receivables, inventory, and payables efficiently, and possibly securing short-term financing options to buffer against liquidity crunches.

4. Lease Management: Evaluating and possibly renegotiating lease terms can help manage the burden of lease liabilities.

5. Profitability Focus: Increasing revenue and controlling costs to improve profitability can help improve retained earnings and, over time, rectify the negative equity.

Conclusion

The balance sheet reveals several financial health concerns, particularly the negative equity and high levels of debt and liabilities. Addressing these issues is crucial for improving the company's financial stability and attractiveness to investors and creditors.

Give me the financial ratio of this company compared with industry standard in a tabular or in a chart

To compare the financial ratios of this company with industry standards, we will need to calculate key ratios and then provide typical industry averages for comparison. The key ratios we'll calculate are:

1. Current Ratio
2. Quick Ratio
3. Debt to Equity Ratio
4. Interest Coverage Ratio (if interest expense data is available)
5. Return on Assets (ROA) (if net income is available)
6. Return on Equity (ROE) (if net income is available)

Given that the net income and interest expense are not provided, we will focus on the liquidity and solvency ratios we can calculate from the balance sheet.

Calculation of Ratios

Current Ratio: [ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} ]

Quick Ratio: [ \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} ] Note: Inventory data is not provided; hence we can't calculate the Quick Ratio precisely.

Debt to Equity Ratio: [ \text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Equity}} ]

Industry Standards (Example Data)

For comparison, let's use the following example industry standards:

Calculated Ratios for the Company

Comparison Chart

Let’s visualize these ratios in a bar chart for better understanding.

python
DownloadCopy code
1import matplotlib.pyplot as plt
2import numpy as np
3
4# Data preparation
5ratios = ['Current Ratio', 'Quick Ratio', 'Debt to Equity Ratio']
6company_2023 = [1.09, None, -225.29]
7company_2022 = [1.09, None, -226.78]
8industry_standard_min = [1.5, 1.0, 0.5]
9industry_standard_max = [2.0, 1.5, 1.5]
10
11x = np.arange(len(ratios))
12
13# Creating the bar chart
14plt.figure(figsize=(12, 6))
15
16bar_width = 0.2
17
18# Bars for company ratios
19plt.bar(x - bar_width, company_2023, bar_width, label='Company 2023', color='b')
20plt.bar(x, company_2022, bar_width, label='Company 2022', color='r')
21
22# Error bars for industry standards
23plt.bar(x + bar_width, industry_standard_min, bar_width, label='Industry Min', color='g', alpha=0.5)
24plt.bar(x + bar_width, industry_standard_max, bar_width, label='Industry Max', color='g', alpha=0.5)
25
26# Adding labels
27plt.xlabel('Ratios')
28plt.ylabel('Values')
29plt.title('Company Financial Ratios vs. Industry Standards')
30plt.xticks(x, ratios)
31plt.legend()
32
33plt.show()

Since we are creating this as an example, I will execute this visualization in Python.

Visualization Output

Below is the comparison chart for the financial ratios of the company against industry standards:

python
DownloadCopy code
1import matplotlib.pyplot as plt
2import numpy as np
3
4# Data preparation
5ratios = ['Current Ratio', 'Debt to Equity Ratio']
6company_2023 = [1.09, -225.29]
7company_2022 = [1.09, -226.78]
8industry_standard_min = [1.5, 0.5]
9industry_standard_max = [2.0, 1.5]
10
11x = np.arange(len(ratios))
12
13# Creating the bar chart
14plt.figure(figsize=(12, 6))
15
16bar_width = 0.2
17
18# Bars for company ratios
19plt.bar(x - bar_width, company_2023, bar_width, label='Company 2023', color='b')
20plt.bar(x, company_2022, bar_width, label='Company 2022', color='r')
21
22# Error bars for industry standards
23plt.bar(x + bar_width, industry_standard_min, bar_width, label='Industry Min', color='g', alpha=0.5)
24plt.bar(x + bar_width, industry_standard_max, bar_width, label='Industry Max', color='g', alpha=0.5)
25
26# Adding labels
27plt.xlabel('Ratios')
28plt.ylabel('Values')
29plt.title('Company Financial Ratios vs. Industry Standards')
30plt.xticks(x, ratios)
31plt.legend()
32
33plt.show()

The chart shows that the company's current ratio is below the industry standard, indicating potential liquidity issues. The debt to equity ratio is significantly negative due to negative equity, highlighting the company's financial risk and instability.

give me the graphical presentation - bar or histogram to compare those with industry standards

It seems that there's an issue generating the chart. Let's try creating the bar chart with the key financial ratios and their industry standards manually.

Financial Ratios Comparison Table

Interpretation of Financial Ratios:

• Current Ratio:

  • Company (2023): 1.09
  • Industry Standard: 1.5 - 2.0
  • Analysis: The company's current ratio is below the industry standard, indicating potential liquidity issues.

• Debt to Equity Ratio:

  • Company (2023): -225.29
  • Industry Standard: 0.5 - 1.5
  • Analysis: The company's debt to equity ratio is significantly negative due to negative equity, highlighting substantial financial risk compared to the industry standard.

Would you like to proceed with another type of analysis or specific details on the financial ratios?