POLYTEC HNIC INSTITUTE OF BRAGANCA SCHOOL OF PUBLIC MANAGEMENT, COMMUNICATION AND TOURISM FINANCIAL ANALYSIS – Theory and Practice – Coordinating… [608966]

POLYTEC HNIC INSTITUTE OF BRAGANCA
SCHOOL OF PUBLIC MANAGEMENT, COMMUNICATION AND TOURISM

FINANCIAL ANALYSIS
– Theory and Practice –

Coordinating teacher:
CATARINA FERNANDES

Student: [anonimizat]
2018

CONTENTS

INTRODUCTION ………………………….. ………………………….. ………………………….. …………………… 1
Chapter 1 ………………………….. ………………………….. ………………………….. ………………………….. ……. 3
FUNDAMENTAL CONCEPTS IN FINANCIAL ANALYSIS ………………………….. ……………. 3
1.1 Cash flows ………………………….. ………………………….. ………………………….. ……………………….. 3
1.2 Earnings ………………………….. ………………………….. ………………………….. ………………………….. . 4
1.3 Capital empl oyed and capital investment ………………………….. ………………………….. ………….. 4
1.4 Walking through from earnings to cash flow ………………………….. ………………………….. …….. 5
1.5 Getting to grips with consolidated accounts ………………………….. ………………………….. ……… 5
1.6 How to cope with the most complex points in financial accounts ………………………….. …….. 6
Chapter 2 ………………………….. ………………………….. ………………………….. ………………………….. ……. 8
FINANCIAL RISK AND INVESTMENT ANALYSIS ………………………….. ………………………. 8
2.1 Definition and types of financial risk ………………………….. ………………………….. ……………….. 8
2.2 Definition and types of investment analysis ………………………….. ………………………….. ……… 9
Chapter 3 ………………………….. ………………………….. ………………………….. ………………………….. ….. 11
FINANCING DECISIONS AND MARKET EFFICIENCY ………………………….. ……………… 11
3.1 Efficient Markets and investor behavior ………………………….. ………………………….. …………. 11
3.2 An Overview of Corporate Financing ………………………….. ………………………….. …………….. 11
3.3 How Corporations Issue Securities ………………………….. ………………………….. ………………… 12
Application ………………………….. ………………………….. ………………………….. ………………………….. .. 14
ECONOMIC & FINANCIAL ANALYSIS IN S.C. PICASSO S.R.L. ………………………….. … 14
1. Brief history ………………………….. ………………………….. ………………………….. ……………………… 14
2. Object of activity ………………………….. ………………………….. ………………………….. ………………. 14
3. Org anizational and functional structure of society ………………………….. …………………………. 14
4. Commercial analysis of the company ………………………….. ………………………….. ………………. 16
4.1 The market on which the company operates ………………………….. ………………………….. … 16
4.2 Providers ………………………….. ………………………….. ………………………….. …………………….. 16
4.3 Products and services offered – product policy ………………………….. …………………………. 16
4.4 Pricing Policy ………………………….. ………………………….. ………………………….. ……………… 17
5. Human resources ………………………….. ………………………….. ………………………….. ………………. 17
6. Economic and financial analysis of the company ………………………….. ………………………….. . 18

6.1 Influence of the stock level on the liquidity and solvability of the company ……………… 21
6.2 The influence of stocks on the economic and financial balance of the company ……….. 23
6.3 Profitability of the company ………………………….. ………………………….. ………………………. 24
7. The supply within S.C. PICASSO SRL ………………………….. ………………………….. ……………. 25
8. Stock Analysis at S.C. PICASSO SRL ………………………….. ………………………….. …………….. 26
CONCLUSIONS ………………………….. ………………………….. ………………………….. ……………………. 27
BIBLIOGRAPHY ………………………….. ………………………….. ………………………….. ………………….. 28

1
INTRODUCTION

“Financial analysis is the process of evaluating businesses, projects, budgets and other
finance -related entities to determine their performance and suitability. Typically, financial analysis
is used to analy se whether an entity is stable, solvent, liquid or profitable enough to warrant a
monetary investment. When looking at a specific company, a financial analyst conducts analysis
by focusing on the income statement, balance sheet and cash flow statement ”1.
“Financial statements are prepared to meet external reporting obligations and
also for decision making purposes. They play a dominant role in setting the framework of
managerial decisions. But the information provided in the financial statements is not an end in
itself as no meaningful conclusions can be drawn from these statements alone ”2.
First chapter of this analysis provides a gradual introduction to the foundations of finan cial
analysis. It will be examined the concepts of cash flow, earnings, capital employed and invested
capital, and look at the ways in which these concepts are linked.
In the second chapter will be presented the significance of the notion s of financial risk and
investment analysis , as well as their types. In terms of the first notion , it can be said that in vestors
do not notice or appreciate the financial risk created by moderate borrowing, although they wake
up when debt is “excessive.” If so, stockholders in moderately leveraged firms may accept a lower
rate of return than they really should. The second notion, namely investment analysis, concerns
which projects a company should accept and which it should reject ; accordingly, the question of
what makes up a project is central to this chapter .
We will talk further about financing decisions and the efficiency market , a subject that
should not be neglected considering that sometimes decisions about capital structure depend on
project choice or vice versa, and in those cases the financing decisions and market efficiency have
to be considered jointly. “Behavioral finance, which relies on psychological evidence to interpret
investor behavior, is consistent with many of the deviations from market e fficiency. Behavioral
finance says that investors are averse to even small losses, especially when recent investment

1 https://www.investopedia.com/terms/f/financial -analysis.asp
2 https://www.scribd.com/document/29603955/Financial -Statement -Analysis -Theory

2
returns have been disappointing ”3. This subject, however, will be discussed in the third chapter of
this paper.
The same chapter provides a presentation of corporate finance and how corporations issue
securities. We will discuss the various responsibilities of the corporation’s financial managers and
how to tackle many of the problems that these managers are expected to solve. This paper will also
outline the financial decisions that corporation's managers must take and why they are important.
“To survive and prosper, a company must satisfy its customers. It must also produce and
sell products and services at a profit. In order to produce, it needs many assets — plant, equipment,
offices, computers, technology, and so on. The company has to decide (1) which assets to buy and
(2) how to pay for them. The financial manager plays a key role in both these decisions. The
investment decision, that is, the decision to invest in assets like plant, equipment, and know -how,
is in large part a responsibility of the financial manager. So is the financing decision, the choice of
how to pay for such investments ”4.
“If a stock or bond is sold publicly, it can then be traded on the securities markets. But
sometimes investors intend to hold on to their securities and are not concerned about whether they
can sell them. In these cases there is little advantage to a public issue, and the firm may prefer to
place the securities directly with one or two financial institutions ”5. At the end of this chapter we
explain how companies arrange a private placement.
The practical part is based on the economic and financial analysis of a cosmetic salon,
which represents a roman ian legal entity, using its balance sheet and the profit and loss account.
By performing this analysis, we will show why it is important for small business owners and
managers to measure progress, including the company in question.

3 http://highered.mheducation.com/sites/0073530743/student_view0/chapter11/index.html
4 Brealey, R.A., Myers, S.C., Marcus, A.J., Fundamentals of Corporate Fin ance, 3rd ed., published by University of
Phoenix, USA, 2001, p. 4.
5 Brealey, R. A., Myers, S. C., Allen, F., Principles of Corporate Finance , 10th ed., published by McGraw -Hill/Irwin,
NY, 2011, p. 362.

3
Chapter 1
FUNDAMENTAL CONCEPTS IN FINANCIAL ANALYSIS

1.1 Cash flows
“Cash flow is the net amount of cash and cash-equivalen ts moving into and out of a
business. Positive cash flow indicates that a company's liquid assets are increasing, enabling it to
settle debts , reinvest in its business, return money to shareholders, pay expenses and provide a
buffer against future financial challenges. Negative cash flow indicates that a company's liquid
assets are decreasing. Net cash flow is distinguished from net income , which includes accounts
receivable and other items for which payment has not actually been received. Cash flow is used to
assess the quality of a company's income, that is, how liquid it is, which can indicate whether the
company is positioned to remain solvent ”6.
The corresponding task for a financial manager is to reclassify company cash flows by
category to draw up a cash flow document that can be used to7:
– analyse past trends in cash flow (the document put together is generally known as a cash
flow statement1)8;
– project future trends in cash flow, over a shorter or longer period (the docume nt needed
is a cash flow budget or plan).
“Cash flow statements are divided into three categories: operating cash flow , investing
cash flow and financing cash flow . Operat ing cash flows are those related to a comp any's
operations . Investing cash flows relate to its investments in businesses through acquisition ; in
long-term assets, such as towers for a telecom provider; and in securities. Financin g cash flows
relate to a company's investors and creditors: dividends paid to stockholders would be recorded
here, as would cash proceeds from issuing bonds ”9.

6 https://www.investopedia.com/terms/c/cashflow.asp
7 Quiry, P., Dallocchio, M., Le Fur, Y., Salvi, A., Corporate Finance – Theory and Practice , 2nd ed., published by
John Wiley & Sons Ltd., UK, 2009, p. 19.
8 Or sometimes as a statement of changes in financial position.
9 https://www.investopedia.com/terms/c/cashflow.asp

4
Free cash flow represents a company's operating cash flow minus capital expenditures .
These are money that can be used to pay dividends, buy shares, pay off debts, and expand a
business.
1.2 Earnings
Earnings are the main source of s hare price, as their revenue can indicate if the business
will be profitable and if it is successful in the f uture . Earnings are among the most researched items
in a company's financial statements because they show the company's profitability compared to
the analyst's estimates .
“There are many different measures and uses of earnings. Some analysts like to calculate
earnings before taxes. This is referred to as pre -tax income, earnings before taxes, or EBT. Some
analysts like to see earnings before interest and taxes. This is referred to as earnings before interest
and taxes, or EBIT. Still other analysts, m ainly in industries with a high level of fixed assets, prefer
to see earnings before interest, taxes, depreciation and amortization, also known as EBITDA. All
three measures provide varying degrees of profitability ”10.
In practice, when accountants calculat e earnings that are in the company's profit and loss
account, they do not measure actual depreciation. However, these earnings are based on accepted
accounting principles that do not have the appropriate rules to calculate the depreciation of the
firm's as sets. A change in the amortization method can completely change earnings without the
company's profitability being affected. Other accounting possibilities that may affect reported
earnings are the stock valuation method or the decision to treat research a nd development as a
current expense11.

1.3 Capital employed and capital investment
Capital employed (or funds employed ) is the total amount of capital used to earn the profit.
It is therefore , the value of assets used in a business and is calculated by adding fixed assets to
working capital or by lowering the current liabilities of the total of these assets.
Capital investments relate to funds invested in a company, the main objective being to
achieve business objectives . Capital investments may also be related to the acquisition of capital
assets or fixed assets by the firm such as factories and production machines, which should be

10 https://www.investopedia.com/terms/e/earnings.asp
11 Brealey, R.A., Myers, S.C., Marcus, A.J, op. cit ., p. 298 -299.

5
productive over a long period of time. There are a variety of sources of capital investment such as
capital investors, banks, financial institutions or venture capital.

1.4 Walking through from earnings to cash flow
Recreating the operational cash flows is a first step in the move from the profit and loss
account to the cash flow. There are only a few differences between operating receipts and operating
revenues but also between operat ing costs and operati ng payments, and these are related to
payment terms (deferred payments) and changes in inventories (deferred charges ). The difference
between the operating cash flow and the generation of assets within the operating cycle is the
change in operating working (EBITDA).
For capital expenditure, there is no direct link between cash flow and net income, as they
record capital expenditure while they are paid, and the latter relates the cost of capital over the
useful life.
From the financing point of view, the cash flow statement does not distinguish between
capital and remuneration related to the sources of financing, while the income statement only
indicates the profitability of debt financing (interest expense) and income tax. Net revenue should
normally be in "cash at hand", which with other non -cash outflows forms the cash flow . Cash flow
can be transferred either into an inflow or in a one -time adjusted cash outflow for the change in
operating working capital to arrive at cash flow from operating activities12.
“Lastly, factoring in the investment cycle, which gives rise to outflows sometimes offset
by fixed asset disposals, and the equity financing cycle, we arrive at the decrease in net debt ”13.

1.5 Getting to grips with consolidated accounts
In this subchapter will be presented the basic aspects of the consolidation. The purpose of
consolidated accounts is to present the financial situation of an entire group of companies as if it
were a single entity .
“An analysis of t he accounting documents of each individual company belonging to a
group does not serve as a very accurate or useful guide to the economic health of the whole group.

12http://www.vernimmen.com/Vernimmen/Summaries_of_chapters/Part_1_FINANCIAL_ANALYSIS/Chapter_5_
Walking_through__from_earnings_to_cash_flow.html?iframe .
13 Ibidem .

6
The accounts of a company reflect the other companies that it controls only through the boo k value
of its shareholdings (revalued or written down, where appropriate) and the size of the dividends
that it receives ”14.
In some cases, consolidated accounts take some time to come out or even do not
exist15. So, financial analysis may need a deeper understanding of key consolidated figures such
as revenues and earnings and shareholders’ equity16.

1.6 How to cope with the most complex points in financial accounts
“Accruals are used to recognise revenue and costs booked in one period but relating to
another period. To accrue basically means to transfer revenue or costs from the P&L (profit &
loss) to the balance sheet . Deferred income and prepaid cost form part of operating working capital.
Accrued costs are either part of the working capital if short term or of fixed assets if they
correspond to a long -term asset (e.g. R&D costs) ”17.
Construction projects that are in progress represent a part of the working capital. Although
the completed contract method may seem prudent, the percentage of the completion method results
in less volatile profits because they are split into several fiscal years. With regard to changes in
accounting methods for construction contracts, they may be an attempt by analysts to artificially
improve net revenue published for a given year. There are cases where the completion of a project
can take years. For example, construction of dams or ships that can be worked over a number of
years can be considered.
Convertible bonds are those that can be converted at the request of their holders into shares
of the issuing company. The initiator of the conversion is the investor. Convertible bonds are
treated as 50% equity and 50% debts, assuming they are at halfway between equity and debt.
However, it is recommended that the conditions requiring a bond conversion and the classification
of equity/debt to be reviewed on the basis of the results of this analysis. For instance , if the s hare
price is above the conversion price, it is likely that the bonds will be converted, which means they
should be treated as equity. For a fair valuation, interest charges net of tax, have to be reversed

14 Quiry, P., Dallocchio, M., Le Fur, Y., Salvi, A., op. cit., p. 73.
15 For example, it took nine months for Dutch supermarket group Ahold to produce its 2002 consolidated accounts
after it had discovered accounting frauds in its US subsidiary.
16 Quiry, P., Dallocchio, M., Le Fur, Y., Salvi, A., op. cit., p. 74.
17 Idem , p. 95 .

7
from the income statement, leading to an increase in net income. Also, the number of shares must
be increased by those issued by converting convertible bonds18.
Deferred tax occurs when:
• there are differences between the carrying amount and the tax base of a receivable or
liability ;
• these differences are reversible (temporary) ;
• these receivables or debts are subject to taxation .
An enterprise must recognize a deferred tax liability, with some exceptions , where it is
possible that the recovery or settlement of the carrying amount of an asset or liability may result
in higher or lower f uture tax payments on current profits than would be their value if such recovery
or settlement would not have tax consequences.
“Deferred taxation is the product of accounting entries triggered by differences between
accounting values and tax bases (on the balance sheet) or between accounting and tax treatments
(on the income statement). The corresponding double entry is made either on the income statement
or to shareholders’ equity ”19.
“Where a parent company does not subscribe either at all or only partially to a capital
increase by one of its subsidiaries that takes place above the subsidiary’s book value, the parent
company records a dilution profit . Likewise, if the valuation of the s ubsidiary for the purpose of
the capital increase is less than its book value, the parent company records a dilution loss ”20.

18 Idem , p. 96.
19 Idem , p. 99.
20 Ibidem .

8
Chapter 2
FINANCIAL RISK AND INVESTMENT ANALYSIS

2.1 Definition and types of financial risk21
“Financial risk is the possibility that shareholders will lose money when they invest in a
company that has debt, if the company's cash flow proves inadequate to meet its financial
obligations. When a company uses debt financing , its creditors are repaid before its shareholders
if the company becomes insolvent. Financial risk also refers to the possibility of a corporation or
government defaulting on its bonds, which would cause those bondholders to lose money.
Financial risk is the general term for many different types of risks related to the finance
industry. These include risks involving fina ncial transactions such us company loans, and its
exposure to loan default. The term is typically used to reflect an investor's uncertainty of collecting
returns and the potential for monetary loss.
Investors can use a number of financial risk ratios to as sess an investment's prospects. For
example, the debt -to-capital ratio measures the proportion of debt used, given the total capital
structure of the company. A high proportion of debt indicates a risky investment. Another ratio,
the capital expenditure ra tio, divides cash flow from operations by capital expenditures to see how
much money a company will have left to keep the business running after it services its debt.
There are many types of financial risks. The most common ones include credit risk,
liquid ity risk, asset backed risk, foreign investment risk, equity risk and currency risk.
Credit risk is also referred to as default risk. This type of risk is associated with people
who borrowed money and who are unable to pay for the money they borrowed. As s uch, these
people go into default. Investors affected by credit risk suffer from decreased income and lost
principal and interest, or they deal with a rise in costs for collection.
Liquidity risk involves securities and assets that cannot be purchased or s old fast enough
to cut losses in a volatile market. Asset -backed risk is the risk that asset -backed securities may
become volatile if the underlying securities also change in value. The risks under asset -backed risk
include prepayment risk and interest rat e risk.

21 https://www.investopedia.com/terms/i/investment -analysis.asp

9
Changes in prices because of market differences, political changes, natural calamities,
diplomatic changes or economic conflicts may cause volatile foreign investment conditions that
may expose businesses and individuals to foreign investment risk. Equity risk covers the risk
involved in the volatile price changes of shares of stock.
Investors holding foreign currencies are exposed to currency risk because different factors,
such as interest rate changes and monetary policy changes, can alter the value of the asset that
investors are holding ”.

2.2 Definition and types of investment analysis22
“Investment analysis is a broad term that encompasses many different aspects of investing.
It can include analyzing past returns to make predictions about fut ure returns, selecting the type of
investment vehicle that is best for an investor's needs or evaluating securities such as stocks and
bonds for valuation and investor specificity.
Investment analysis can help determine how an investment is likely to perform and how
suitable it is for a given investor. It is key to any sound portfolio management strategy. Investors
who are not comfortable doing their own investment analysis can seek profes sional advice from
a financial advisor or other financial professional. Investment analysis can also involve evaluating
past investment decisions in terms of the thought process tha t went into making them, how the
decision affected a portfolio's performance and how mistakes can be regarded and corrected. Key
factors in investment analysis include entry price, expected time horizon and reasons for makin g
the decision at the time.
When making investment decisions, investors can use a bottom -up investment analysis
approach or top -down approach. Bottom -up investment analysis entails analyzing individual
stocks for their merits, such as valuation, management competence, pricing power and other
unique characteristics of the stock and company. Bottom -up investment analysis does not focus on
economic cycles or market cycles firsthand for capital allocation decisions but inste ad aims to find
the best companies and stocks regardless of economic, market or particular industry macro trends.
In essence, bottom -up investing takes more of a microeconomic approach to investing rather than
a macroeconomic one, which is a hallmark of to p-down investment analysis.

22 Ibidem.

10
Top-down investment analysis emphasizes economic, market and industrial trends before
making a more granular investment decision to allocate capital to specific companies. An example
of a top -down approach is an investor evaluat ing industries and finding that financials will likely
perform better than industrials; as a result, the investor decides his investment portfolio will be
overweight financials and underweight industrials. The investor then proceeds to find the best
stocks in each sector. On the contrary, a bottom -up investor may have found that an industrial
company made for a compelling investment and allocated a significant amount of capital to it even
though the outlook for its broader industry was negative.
Other inves tment analyses include fundamental analysis and technical analysis.
Fundamental analysis stresses evaluating the financial health of companies as well as economic
outlooks. Technical analysis stresses evaluating patterns of stock prices and statistical par ameters ”.

11
Chapter 3
FINANCING DECISIONS AND MARKET EFFICIENCY

3.1 Efficient Markets and investor behavior
The perception that markets are making mistakes and that they are often not based on real
value is supported by Barberis and Thaler, which highlights the main elements that are reflected
in investor behavior 23:
 Overconfidence : Investors trust their tenacity, which results from their inability to
estimate confidence intervals for quantities (such as the level of the Dow) and the probability of
occurrence of an event ;
 Optimism and Wishful Thinking : People have optimistic and unrealistic views.
The m ost think they have abilities above average ;
 Representativeness : “Individuals show systematic biases in how they classify data
and evaluate. One manifestation of this bias is that they ignore sample sizes, when judging
likelihood, treating a 60% success rate in a sample of 10 and the same success rate in a sample of
1000 equivalently, even though the latter should convey more informat ion”24;
 Conservatism and Belief Perseverance : Individuals support their ideas about
certain data without reacting to new information. Having an opinion, they avoid looking for
evidence to the contrary, and if they have such evidence, they do not trust their credibility ;
 Anchoring : “When forming estimates, individuals start with an initial and often
arbitrary value and adjust this value insufficiently ”25;

3.2 An Overview of Corporate Financing
There are a few financing issues about how much this company should raise and in what
form. However, a series of questions about this funding will be debated26:
1. Why do firms prefer internally generated funds?

23 Barberis, N. & Thaler, R., A Survey of Behavioral Finance , NBER Working Paper , 2002 .
24 Damodaran, A., Applied Corporate Finance , 4th ed., published by Stern School of Business, NY, 2014, p. 36.
25 Ibidem .
26 Pike, R., Neale, B., Corporate Finance and Investment – Decisions and Strategies , 6th ed., published by Pearson
Education, UK, 2009, p. 320 -321.

12
Internally generated funds represent a large part of corporate funds and they are one of the
convenient sources of funding.
2. How much should companies borrow?
This is an essential question for a corporation, with levels of borrowing being different
among companies and among countries. For example, in Italy, Japan, Germany levels of borrowing
are higher than in the United Kingdom and the US. One reason would be the difference in the
power of relationship between creditors and borrowers.
3. What form of debt is appropriate?
This question has a strategic content about the level of borrowing , and a tactical content
about the appropriate form of debt s or how to manage them. Both of them refer to the capital
structure decisions , taking into account:
a) form
b) maturity
c) interest rate
d) currency mix
4. How do you finance asset growth?
A company must determine how much of the planned investment will be f inanced by
short-term and how much will be financed by long -term finance , which presumes a compromise
between risk and return . There are two types of current assets:
a) Permanent current assets – those that are owned to meet the company's long -term
requirements ;
b) Fluctuating current assets – those that change through seasonal or cyclic variations.

3.3 How Corporations Issue Securities
 Venture Capital
“Venture capital is capital provided by investors to small business and start -up firms that
have potential high growth opportunities. Venture capital investments have a potential for
considerable loss or profit and is generally designated for new and speculative enterprises who
seek to generate a return through a potential initial public offering or sale of the company ”27.

27 https://www.privco.com/knowledge -bank/definition/venture -capital

13
 Initial Public Offering – IPO'
“An initial public offering (IPO) is the first time that the stock of a private company is
offered to the public. IPOs are often issued by smaller, younger companies seeking capital to
expand, but they can also be done by large privately owned companies looking to become publicly
traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine
what type of security to issue, the best offering price , the amount of shares to be issued and the
time to brin g it to market ”28.

 General cash offers by public companies
“After the initial public offering a successful firm will continue to grow and from time to
time it will need to raise more money by issuing stock or bonds. An issue of additional stock by a
compan y whose stock already is publicly traded is called a seasoned offering. Any issue of
securities needs to be formally approved by the firm’s board of directors. If a stock issue requires
an increase in the company’s authorized capital, it also needs the con sent of the stockholders ”29.

 The private placement
“An alternative to a general subscription is a private placement, in which securities are
sold directly to one or a few investors. The terms for the securities are negotiated between the two
parties. The primary advantage of private placements over general subscriptions is the lower cost,
because there are fewer intermediaries and no need for underwriting guarantees or marketing.
There are also substantial savings in time and administrative costs because t he SEC registration
requirements are bypassed. The other advantages are that the terms of the bond can be tailored to
meet the specific needs of the buyer, and the firm can convey proprietary information (presumably
positive) to the potential investors ”30.

28 https://www.investopedia.com/terms/i/ipo.asp
29 Brealey, R.A., Myers, S.C., Marcus, A.J., op. cit., p. 528.
30 Damodaran, A., op.cit. , p. 38.

14
Application
ECONOMI C & FINANCIAL ANALYSIS IN S.C. PICASSO S.R.L.

1. Brief history
S.C. PICASSO S.R.L. is a romanian legal entity, having the legal form of a limited liability
company and carries on its business in accordance with Law 31/1990 of the republican companies
and with statute of the company. It is a business born on the basis of a desires or a dream and put
into practice to be fulfilled. Society has three years since its establishment and throughout these
years, through its object of activity , the company has tried and managed to offer the most customers
(most women) quality services and products recommended for maintenance body at favorable
prices compared to those extended on the market.

2. Object of activity
According to the statute of the company, the main object of activity is: hairdressing,
cosmetic, manicure, pedicure and massage services . The purpose of secondary activity is the sale
at the point of work of body care products addressed to women .

3. Organizational and functional structure of society
The presentation of the organizational and functional structure of the company is provided
in the Organization and Functioning Regulations or in the Company's Statute. Through the
organizational and functional structure are highlighted the following:
 the hierarchy of different organizational structures, respectively the grouping of
workstations in the offices, depending on the segment of activity analyzed;
 the framing of the analyzed activity in the organizational struct ure specific to the
beneficiary (it is necessary to identify the specialized departments or persons that mainly
perform the analyzed activity);
 inventory of other functions and subfunctions of society to investigate in what measure the
concrete way of thei r performance influences the analyzed activity .

15
The study of the organizational structure is necessary because it highlights the way in
which the company's activities materialize on concrete organizational structures (persons, work
stations, offices).

Organization chart of the organizational structure at S.C. PICASSO SRL

Figure 1.1

The functional structure of the company presented in fig. 1.2 is important because the
successive approach in stages, functions and subfunctions allows identification of all activities and
subactivities in society, resulting in a concrete global picture.

Organization chart of the functional structure at S.C. PICASSO SRL

Figure 1.2
GENERAL
MANAGER
COMMERCIAL
OFFICE
SUPPLY
DEPARTMENT
INVENTORY
CONTROL
MANAGEMENT
STORES
FOR SALE
ACCOUNTING
FINANCIAL
OFFICE
LEGAL
OFFICE
PERSONAL
OFFICE
ADMINISTRATIVE
OFFICE
GENERAL
MANAGER
COMMERCIAL
FUNCTION
FINANCIAL –
ACCOUNTING
FUNCTION
LEGAL FUNCTION
PERSONAL
FUNCTION
PRODUCTION
FUNCTION

16
4. Commercial analysis of the company
4.1 The market on which the company operates
Picaso's market has undergone significant structural changes due to the gradual increase
in the number of customers and good quality services offered along with the increase in people's
purchasing power and well -being. The main feature of the company's mar ket is relatively
independent of suppliers, as well as to the beneficiaries of services – the clients, even more
numerous, even if the economic power is lower.

4.2 Providers
In order to evaluate the suppliers of products for hairdressing, manicure, pedicure,
cosmetics, but also for retail sale at the work point, the company considers a number of criteria
such as:
 their ability to meet the quality requirements for a product or service;
 the availability of equipment and qualified personnel according to technical standards and
hygienic – sanitary requirements;
 their commercial and financial viability;
 the ability to comply with scheduled delivery schedules;
 the effectiveness of their quality assurance system.

4.3 Products and services offered – product policy
According to the company's statute, S.C. PICASSO S.R.L. offers hairdressing, cosmetic,
manicure, pedicure and massage services. Each segment of activity is well structured and runs
according to a pre -established order in agreement with the client an d according to the procedural
rules in the field. The products offered are professional games for hairdressers and cosmetic salons
and dermatologically endorsed by the Ministry of Health from the most renowned companies and
domestic or international compan ies. All of these products are tested according to domestic and
international standards.
In setting the product policy the company aims at achieving the following objectives:
 strengthening the position in current consumer segments;
 better positioning with in the competitive environment;
 increasing the volume of business with existing customers;

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 promotion of company marketing through services provided by employees .

4.4 Pricing Policy
The pricing policy is one of the fundamental elements of any society marketing. This is
determined by the fact that price decisions have important implications for other components of
marketing policy.
To substantiate a timely price strategy, the company took into account the following
coordinates:
 price orientation based on costs for full cost coverage; the prices are highlighted for each
service offered in part but other prices are used for different service packages;
 price orientation based on demand – the company must consider the solvency of customers
for situations where demand is high in setting a high price, while the existence of a low
price should not lead to the suspicion of a poor quality service;
 price orientation based on competition – the company tries to align the prices with those of
the competition .

5. Human resources
The staff is employed on a full -time individual employment contract for an indefinite
period. Also, for each post, there were written job descriptions in which the duties and
responsibilities of each are stipulated.
The way of salary in the society is made according to the importance of the position, a
responsibility and competence of the tasks and attributions of each post. Thus, the following forms
of remuneration are established:
 payroll , after hours worked for staff with economic function s;
 payroll , plus pay add -on that applies in percentages to direct service providers;
 salary increases are granted for hours worked systematically over working hours .
Because the service delivery emphasizes the quality, the management of the company has
built a program of professional training of the employees by sending them to specialization and
improvement courses at the expense of the company.

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6. Economic and financial analysis of the company
Characterization of the Economic and Financial Potential and Balance of S.C. PICASSO
SRL assumes the knowledge of some essential elements on which the activity of the company
depends, such as: the capacity of the company, the human resources available to the company, the
labor productivity, the material resource s etc.
A look at the operating income indicators compared to the company's operating expenses
as well as the operating result are included in the company's profit and loss account for the years
2015 and 2016 from the managerial point of view. Thus, the fo llowing table presents the evolution
of the company's activity in previous years .

Evolution of income and expense indicators at SC PICASSO SRL

NO. INDICATORS CURRENCY
SYMBOL
RON EVOLUTION DIFFERENCE
+/-
Thousands 2015 2016
1. Fiscal value 63400 85760 22360
2. Production stored 4910 1145 – 3765
3. Production immobilized 740 1035 295
4. Other operating revenues – – –
5. OPERATING INCOME 69050 87940 18890
6. Expenses with goods – – –
7. Raw materials 23330 28151 4821
8. Energy and water 5915 6325 410
9. Other material expenses 1025 1210 -15
10. TOTAL material expenses 24355 29361 5006
11. Taxes and fees 2350 3347 997
12. Staff costs 20768 25315 4547
13. OPERATING EXPENSES 56250 69830 13580
14. Financial income 190 165 -35

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15. Financial expenses 3350 5205 1855
16. FINANCIAL RESULT 3160 5040 1880
17. TOTAL INCOME 72000 90075 18075
18. TOTAL EXPENSES 62600 76685 14085
19. GROSS OPERATING RESULT 9400 13390 3990

Analyzing the patrimonial structure of the company, we intend to establish and follow the
evolution of the weight of the various patrimonial assets (active and passive). Patrimonial structure
rates offer the possibility to express the balance in percentages and allow the identification of the
major features of the balance sheet structure, also offering the possibility of performing
comparative analyzes in time and space.

1. Asset structure rates as a value are influenced by technical, economic and legal
characteristics of the firm's business. This reflects the intensity of the ties and financial
relationships that the company has established with the firms (investments).
 Current assets rate:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 _𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 _𝑎𝑐𝑡𝑖𝑣𝑒𝑥 100 =11611
11452=50,65

This rate reflects the share of current assets in the total economic means of the company.
As complementary rates we will use:
o Stock s rate:
𝑆𝑡𝑜𝑐𝑘𝑠 _𝑟𝑎𝑡𝑒
𝑇𝑜𝑡𝑎𝑙 _𝑎𝑐𝑡𝑖𝑣𝑒𝑥 100 =11611
1152=29,19

o Trade receivables rate :
𝐶𝑙𝑖𝑒𝑛𝑡𝑠 _𝑎𝑛𝑑 _𝑎𝑠𝑠𝑖𝑚𝑖𝑙𝑎𝑡𝑒𝑑 _𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 _𝑎𝑐𝑡𝑖𝑣𝑒𝑥 100

This indicator is influenced by the nature of the customers and by the payout period that
the company grants to its partners.

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 Fixed asset s rate:
𝐹𝑖𝑥𝑒𝑑 _𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 _𝑎𝑐𝑡𝑖𝑣𝑒𝑥 10027906
44360=50,65

This rate reflects the share of fixed assets in the company's total patrimony. As
complementary rates we will use:
o Tangible fixed assets :
𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 _𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 _𝑎𝑐𝑡𝑖𝑣𝑒𝑥 100 =27893
44360=49,64

This reflects the share of fixed expenses in the company's total patrimony and depends on
the specificity of the firm.
o Financial assets rate:
𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 _𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 _𝑎𝑐𝑡𝑖𝑣𝑒𝑥 100 =0,07

2. Rates on the liability structure are as follows :
 Stability rate of funding:
𝑃𝑒𝑟𝑚𝑎𝑛𝑒𝑛𝑡 _𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑇𝑜𝑡𝑎𝑙 _𝑝𝑎𝑠𝑠𝑖𝑣𝑒𝑥 100 =70,90
This rate reflects the stability of the funding and the share of sources the company has in
its total coverage over a period of more than one year.

 Financial autonomy rate:
𝐸𝑞𝑢𝑖𝑡𝑦 _𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑃𝑒𝑟𝑚𝑎𝑛𝑒𝑛𝑡 _𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑥 100 =52,85
It represents the share of own sources in the financing of the company's economic means.

 Total debt s rate:
𝑇𝑜𝑡𝑎𝑙 _𝑑𝑒𝑏𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 _𝑝𝑎𝑠𝑠𝑖𝑣𝑒𝑥 100 =15059 + 7286
16457=62,53
This rate reflects the share of long -, medium – and short -term debt in the patrimony
company.

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In the case of the company subject to this analysis, the structure of assets and liabilities
for the years 2 015/2016 is as follows:

STRUCTURE RATES 2015 2016
Fixed asset rate 57,32 50,65
Tangible fixed assets rate 56,31 49,64
Financial asset rate 0,07 0,07
Current assets rate 42,65 50,65
Stock s rate 29,58 29,19
Financial stability rate 87,29 70,90
Financial autonomy rate 55,64 52,85
Total debt s rate 51,44 62,53

Conclusion : It follows that the company belongs to a segment of activity requiring
significant technical endowment, financial stability is high but is diminishing.

6.1 Influence of the stock level on the liquidity and solvability of the company
Liquidity is the property of patrimonial assets to turn into money. To characterize the
company's liquidity, the short -term liabilities are compared with the available resources for this
period.
The most used liquidity rates are :
 General liquidity rat e:
𝐺.𝐿.=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 _𝑎𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 _𝑑𝑒𝑏𝑡𝑠=1,7
Current debts consist of obligations to suppliers, tax and wages, short -term loans. It is
appre ciated that the general liquidity situation is satisfactory, according to some sources, in the
conditions of this rate ranging from 1.2 -1, and in the interval 2 -2.2.

 Current liquidity rate:
𝐶.𝐿.=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 _𝑎𝑠𝑠𝑒𝑡𝑠 _𝑆𝑡𝑜𝑐𝑘𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 _𝑑𝑒𝑏𝑡𝑠=0,69

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This rate is usually subunit . The range considered satisfactory for this rate is 0.65 -1.

 Immediate liquidity rate :
𝐼.𝐿.=𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑖𝑙𝑖𝑡𝑦 _𝑎𝑛𝑑 _𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 _𝑑𝑒𝑏𝑡𝑠=0,22
A high level of this indicates high solvency, but it may be the consequence of one less
efficient use of available resources. The high amount of this rate does not constitute a guarantee
of solvency at the same time, if the remainder of the current assets have a low degree of liquidity.

Solvency is the ability of the firm to honor its due payment obligations. It can be
expressed using two more important indicators:
 Patrimonial solvency rate :
P.S.=𝐸𝑞𝑢𝑖𝑡𝑦 _𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝐸𝑞𝑢𝑖𝑡𝑦 _𝑐𝑎𝑝𝑖𝑡𝑎𝑙 +𝑇𝑜𝑡𝑎𝑙 _𝑐𝑟𝑒𝑑𝑖𝑡𝑠 =1,12

 Overall solvency rat e:
𝑂.𝑆.=𝑇𝑜𝑡𝑎𝑙 _𝑎𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 _𝑑𝑒𝑏𝑡𝑠=1,6
This rate indicates to what extent total debts are covered by the company's total assets.
The higher the overall solvency rat e than 1, the better the overall financial situation of the firm.
For the company in question we have the following liquidity and solvency ratios registered
for 20 15/2016:

INDICATORS 2015 2016
General liquidity rate 3,36 1,7
Current liquidity rate 1,03 0,69
Immediate liquidity rate 0,42 0,22
Patrimonial solvency rate 1,25 1,12
Overall solvency rat e 1,94 1,6

Conclusion : In both periods, these rates fall within the limits considered normal,
according to international standards. As a trend, there is a slight decrease in all indicators and

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immediate measures are maintaining and even increasing its liquidity and solvency in the coming
periods.

6.2 The influence of stocks on the economic and financial balance of the company
The fina ncial balance of the firm represents a correlation system, which establishes certain
proportions within and between different financial flows. These are a premise but also a
consequence of a normal business activity, according to its object of activity. The premise should
take into account objective correlations between the needs of material resources and financial
possibilities. How these sources are used and exploited depends on ensuring the economic –
financial balance or the deregulation.
To express the multiple correlations involved in the financial equilibrium there is a
multitude of indicators. In practice, we use in particular the following indicators that are of interest
to us:
 Financial autonomy rate:
𝐹.𝐴.𝑅.=𝐸𝑞𝑢𝑖𝑡𝑦 _𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝐸𝑞𝑢𝑖𝑡 𝑦_𝑐𝑎𝑝𝑖𝑡𝑎𝑙 +𝐵𝑜𝑟𝑟𝑜𝑤𝑒𝑑 _𝑐𝑎𝑝𝑖𝑡𝑎𝑙=0,53

 Stocks financing rate :
𝑆.𝐹.𝑅.=𝐹𝑙𝑜𝑎𝑡𝑖𝑛𝑔 _𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝑆𝑡𝑜𝑐𝑘𝑠=0,69

 Self-financing rate of assets :
𝑆.𝑅.𝐴.=𝐸𝑞𝑢𝑖𝑡𝑦 _𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝐹𝑖𝑥𝑒𝑑 _𝑎𝑠𝑠𝑒𝑡𝑠 +𝐶𝑢𝑟𝑟𝑒𝑛𝑡 _𝑎𝑠𝑠𝑒𝑡𝑠=0,37

 Debts rate:
𝐷.𝑅.=𝑇𝑜𝑡𝑎𝑙 _𝑑𝑒𝑏𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠=0,63

Using the data from the balance sheet of the company, we have established an evolution
of the financial equilibrium indicators which is presented as follows:

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INDICATORS 2015 2016
Financial autonomy rate 0,56 0,53
Stocks financing rate 1,01 0,69
Self-financing rate of assets 0,49 0,37
Debts rate 0,51 0,63

Conclusion : The economic and financial balance shows a relative decrease, yet the
liquidity and solvency -like indicators fall within the limits considered satisfactory, which
demonstrates its proper functioning.

6.3 Profitability of the company
One of the fundamental conditions of economic and social progress is the most efficient
use of human, material and finite resources of society. Efficiency is expressed by the ratio between
the results obtained in an economic and social activity (effect) and expenditures = efficiency in the
respective activity. Efficiency balanc es the useful effect – the result obtained (customer
satisfaction) with the expense (effect) made to obtain it expressing the effect -effort relationships.
The main criteria for assessing effectiveness in the service sector are:
1. Net income size and associated profitability
Profitabilit y is the ability of an enterprise to earn profits or net income. For the economic
analysis the activity of an enterprise is important to know the forms that the profit can take:
 accounting profit – represents the surplu s of net income over the accounting cost ;
 economic profit – express es the difference between the total income of the
company and the opportunity costs of all its utility bills over a period of time ;
 the normal profit – consists of a minimum profit that an enterprise must obtain in
order to reach the market .

2. Cost level – represents the total costs incurred by an enterprise for producing and
selling goods and services that are the subject of its activity.
The cost size can be expressed by :
 direct costs , which are identified and measured at the time they are made on each
product ;

25
 indirect costs occasioned by manufacturing the whole production . They are
collected on venues and then distributed to products and services at the end of the
management period.
 fixed costs, which are independent of the volume of production and are borne by
society regardless of production level ;
 variable costs that consist of expenses that vary with the physical volume of
production.
The relative cost level expresses turnover to 10 0 or 1000 ron, thus indicating the
consumption of resources in relation to the obtained economic results:
𝑛=𝑇𝑜𝑡𝑎𝑙 _𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑥 100 𝑜𝑟 𝑛=+𝑇𝑜𝑡𝑎𝑙 _𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠
𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟𝑥 1000

Consideri ng the special importance of capital as a factor of production as well as its
complex structure – fixed and circulating capital; material and money – in practice, other efficiency
indicators are used, such as:
 the number of rotation of capital expressed by the ratio of turnover achieved over
a period of time and the capital used in that period;
 rate of financial autonomy as a ratio between equity and total capital of the
company;
 the rate of overall solvency reflected in the ratio between the total assets o f the
company and the outstanding obligations plus the conditions to be repaid over a
certain period of time;
 the permanent floating capital is calculated as the difference between the
permanent capital and the immobilized asset.

7. The supply within S.C. PICASSO SRL
In an economy where all service providers are interested in meeting customer needs
(demand), at least theoretically, there should be no problems in providing the necessary material
resources. Supply policy aims at highli ghting the possibilities the company possesses in order to
ensure the main products that are consumed in the basic activity and that condition the realization
of the service rendering program and implicit satisfaction of the clients.

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The domestic market of the company is segmented by several suppliers, each holding a
certain share in the supply of products for consumption. For each product range, however, there
are several sources of supply, which is a guarantee for the timely provision of these.
Another as pect specific to the company's supply chain is the supply of products, in terms
of some conditions such as:
 the possible amount to be delivered within a time frame;
 the quality of the delivered products ;
 transport and payment conditions;
 any bonuses .
The d evelopment of the supply process can be structured on several issues,
such as:
a) contract coverage of supply requirements ;
b) realization of the supply program on the total and the main segments of activity;
c) ensuring the consumption needs.

8. Stock Analysis at S.C. PICASSO SRL
By its nature, any stock of materials represents a capital asset. The functions they perform
in the capital movement process determine the company's stock management policy, where their
size is of particular importance.
The analysis of stockpiles of products and materials required in the process of providing
services within the given company, in terms of methodological, concerns several aspects
respectively :
 factors influencing the availability of stocks at SC PICASSO SR L;
 Restrictions on an optimal inventory management system at SC PICASSO;
 the evolution of stocks compared to the registered turnover;
 the evolution of stocks within the company to the level considered normal;
 the degree of immobilization and the grouping o f stocks .

This analysis is taken from the web -site https://www.scribd.com/doc/25280999/Analiza –
Economico -financiara -La-s-c-Picasso -s-r-l-Problematica and translated into english.

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CONCLUSIONS

In conclusion, the financial analysis helps to identify the unsatisfactory activity of the
company and to determine the measures that will influence the results in the future. By the post –
factual, current and predictive knowledge of the activity of the economic agents of the internal
results and the causes they have generated, the analysis contributes to the c ontinuous knowledge
of the efficiency of the use of human, material and financial resources . The financial analysis
fundamentates the entire future economic and financial policy of the enterprise, it is a key condition
for the development and application o f rational decisions, it is based on conducting expert
assessments and negotiations to estimate the value of the enterprise in case of privatization,
reorganization or sale of assets.
In many cases, we can see that much of the analysis of the financial si tuation consists of
a careful research of the reported financial statements, an even more careful reading of the notes
and a rearrangement of the data so as to meet the needs and objectives analyst. The question may
be asked “why do we not accept the finan cial statements as they are presented? ”, or else “why do
we still have to re -count the figures? ”. An obvious answer is that a bit of rearrangement is always
necessary to "understand the figures." Financial statements require analysis as a first step in
extracting information from the data presented in these situations. Secondly, most decisions taken
with the financial analysis are important enough, so accepting unrepaired financial statements is
often a bad policy .
By making this paper, I wanted to emphasiz e that one of the major objectives of the
financial statement analysis is to "understand the figures" or "to decipher the meaning of the
figures" – ie to engage the financial analysis tools as an aid in understanding the data and then use
this power of und erstanding to better manage a business. Various analytical measures can be
developed to describe significant relationships and extract information from financial statements .
Therefore, informed decision making is the real purpose of analyzing financial sta tements.
As a final conclusion, it can be said that the financial analysis, as done in the second part
of the paper, is an indispensable tool for the managerial activity of a company, as it provides
practical solutions for preventing and removing the factors with destructive action and creates on
that basis favorable conditions for the unshakable manifestation of factors with positive influence.

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BIBLIOGRAPHY

BOOKS AND PAPERS

1. BARBERIS, N., THALER, R., A Survey of Behavioral Finance , NBER
Working Pap er, 2002;
2. BREALEY, R. A., MYERS, S. C., ALLEN, F., Principles of Corporate
Finance , 10th ed., published by McGraw -Hill/Irwin, NY, 2011;
3. BREALEY, R.A., MYERS, S.C., MARCUS, A.J., Fundamentals of
Corporate Finance, 3rd ed., published by University of Phoenix, USA, 2001;
4. DAMODARAN, A., Applied Corporate Finance , 4th ed., published by
Stern School of Business, NYU, 2014;
5. PIKE, R., NEALE, B., Corporate Finance and Investment – Decisions and
Strategies , 6th ed., published by Pearson Education, UK, 2009;
6. QUIRY, P., DALLOCCHIO, M., LE FUR, Y., SALVI, A., Corporate
Finance – Theory and Practice , 2nd ed., published by John Wiley & Sons Ltd., UK, 2009 .

WEBSITES

1. http://www.investopedia.com
2. http://www.vernimmen.com
3. http://scribd.com
4. https://www.mheducation.com
5. https://www.privco.com