Statement analysis

Question: "Revenue grew by 10% and net profit by 40%. Is this growth sustainable?"

Answer: "Not necessarily. One-off items come out first: if the growth came from other income (line 2340 of the income statement), such as the sale of a building or the release of a provision, it will not recur next year. Sustainability is shown by profit from sales (line 2200): if its share of revenue has not changed, operating profit grew in line with revenue, by 10%."

Question: "The current ratio is 2.1. Does that mean the company is solvent?"

Answer: "Not necessarily: what matters is what current assets consist of. If 60% of them are inventories, the quick ratio is 0.84 (2.1 × 0.4), and lower still without overdue receivables: short-term liabilities are covered only if the inventories can be sold. That is why liquidity is assessed together with inventory and receivables turnover."

Question: "Profit is growing, but the company is short of cash. Why?"

Answer: "Cash is tied up in working capital: with net profit of RUB 50 million and a RUB 70 million increase in receivables and inventories, operating cash flow can turn negative. Under RAS the cash flow statement shows receipts and payments (clause 6 of PBU 23/2011), so the AI expert will reconstruct the link between profit and cash using the indirect method from the balance sheet and the income statement."

Question: "Return on equity rose from 15% to 20%. What drove it?"

Answer: "Under the DuPont model it is the product of net profit margin, asset turnover and financial leverage. If the net profit margin (5%) and asset turnover (2) are unchanged while leverage rose from 1.5 to 2, the growth came from borrowing, not operations: 5% × 2 × 1.5 = 15%, 5% × 2 × 2 = 20%. Financial risk rose along with the return."

Question: "How do I compare a Russian company with a US competitor that measures inventories under LIFO?"

Answer: "Restate the competitor's statements to FIFO using the disclosed LIFO reserve: add the reserve to inventories and deduct its increase for the year from cost of sales; gross margin and inventory turnover then become comparable. LIFO is not used in Russia: FSBU 5/2019 allows specific identification, average cost and FIFO (clause 36)."

Analysis: "Revenue grew by 25%, receivables by 80%, and operating cash flow has been below net profit for the second year running. The days sales in receivables index (DSRI) of the Beneish model is 1.44 (1.8 / 1.25), a sign of premature revenue recognition. Year-end shipments and returns after the reporting date should be checked."

Question: "The bank requires debt not to exceed 3 × EBITDA. Should leases be included?"

Answer: "That depends on how the loan agreement defines debt, but analysts usually treat leases as debt. If the company does not recognise them on the balance sheet (clause 11 of FSBU 25/2018), the present value of lease payments is added to debt and the payments themselves to EBITDA: debt of RUB 280 million against EBITDA of RUB 100 million gives 2.8, but with leases (a RUB 100 million liability and RUB 12 million of payments a year) it is 3.4 (380 / 112). The headroom under the covenant is smaller than it looks."

Question: "How do I forecast revenue and profit for three years?"

Answer: "From drivers rather than past growth: revenue as volume × price for each business line, variable costs as a percentage of revenue and fixed costs in roubles, working capital through inventory, receivables and payables days. Then free cash flow and three scenarios, base, upside and downside, with sensitivity to price, volume and the exchange rate."

Question: "Group revenue grew by 12%. How much of that growth came from the yuan exchange rate?"

Answer: "Growth is split into organic growth and the currency effect: the Chinese subsidiary's revenue for the current year is translated at last year's rates (under IAS 21, income is translated at the rates at the dates of the transactions or at the average rate for the period). If growth at constant rates is 3%, the exchange rate contributed 9 percentage points, and they will disappear if the rouble strengthens."

Question: "How do I assess the reliability of the bank that holds the company's money?"

Answer: "Using the CAMELS framework and the Bank of Russia's mandatory ratios: capital adequacy N1.0 of at least 8%, instant liquidity N2 of at least 15% and current liquidity N3 of at least 50% (Bank of Russia Instruction No. 199-I). In addition: the share of problem loans, the concentration of funds from large clients and the trend in profit."