Chapter 4
FINANCIAL ANALYSIS : Capital employed and invested capital

The balance sheet shows a snapshot of cumulative inflows and outflows from the company

classified into assets and resources (liabilities and shareholders’ equity).

Assets comprise fixed assets (intangible and tangible fixed assets and long-term investments) and current assets (inventories, accounts receivable, marketable securities and cash and equivalents). Resources comprise shareholders’ equity and bank and financial borrowings, plus trade payables.

A capital-employed analysis of the balance sheet shows all the uses of funds by a company as part of the operating cycle and analyses the origin of the sources of a company’s funds at a given point in time.

On the asset side, the capital-employed balance sheet has the following main headings:

• fixed assets, i.e. investments made by the company;

• operating working capital (inventories and trade receivables minus trade payables). The size of the operating working capital depends on the operating cycle and the accounting methods used to determine earnings;

• non-operating working capital, a catch-all category for the rest.

The sum of fixed assets and working capital is called capital employed. Capital employed is financed by capital invested, i.e. shareholders’ equity and net debt, and thus this sum is equal to capital employed.

Net debt is defined as bank and financial borrowings, be they short-, medium- or long-term, minus marketable securities (short-term investments) and cash and equivalents.

A solvency-and-liquidity analysis lists everything the company owns and everything that it owes, the balance being the book value of shareholders’ equity or net asset value. It can be analysed from either a solvency or liquidity perspective.

Solvency measures the company’s ability to honour its commitments in the event of liquida- tion, whereas liquidity measures its ability to meet its commitments up to a certain date by monetising assets in the ordinary course of business.