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Demystifying Importer Financials: A Comprehensive Guide to Understanding Ratios and Comparatives

In the intricate web of international trade, understanding the financial health of your trading partners is paramount to success. This blog post delves deep into the realm of financial analysis for importers, focusing on the crucial aspects of Comparatives and Ratios. As an Exporter, your ability to dissect and comprehend an importer's financials can provide a competitive edge, enabling you to make informed decisions and foster fruitful partnerships.

We'll take you on a journey of financial literacy, starting with an explanation of key financial terms, followed by an analysis of a detailed balance sheet, and concluding with the importance and interpretation of financial ratios and comparative statements. By the end of this post, you'll have a toolkit of knowledge that can provide valuable insights into the financial standing of potential import partners.

Source: Image extracted from the DNB Report generated by the Exporter

The provided ratios present a more detailed view of the importer's financial health and operational efficiency. Let's analyze each one in relation to its implications for the exporter:

  1. Current Ratio: This ratio indicates the company's ability to pay short-term obligations. A current ratio of 2.11 in 2021, up from 1.12 in 2020, shows that the importer's short-term liquidity has improved significantly. This is a good sign for the exporter as it reduces the risk of delayed payments.

  2. Solvency Ratio: The solvency ratio measures the company's ability to meet its long-term obligations. A solvency ratio of 102.61% in 2021, up from -21,371.12% in 2019, indicates a dramatic improvement in the importer's long-term financial stability. This is a positive sign for the exporter as it lowers the risk of the importer going bankrupt in the long run.

  3. Fixed Assets/Net Worth: This ratio indicates how much of the company's net worth is tied up in fixed assets. A value of 0% in 2021 implies the company has no fixed assets, which might suggest it's primarily a trading company with no manufacturing facilities. This might be a potential concern for the exporter if the importer doesn't have the necessary facilities to store or handle the exporter's goods.

  4. Current Liabilities/Net Worth: This ratio indicates the proportion of the company's net worth that is financed by short-term creditors. A value of 96.05% in 2021 suggests that the company is heavily reliant on short-term financing, which could potentially make it vulnerable to changes in credit conditions.

  5. Asset Turnover Ratio: This ratio measures the efficiency with which a company uses its assets to generate sales. A figure of 479.07% in 2021 shows a huge leap from 0.06% in 2020, indicating a significant increase in the company's operational efficiency.

  6. Sales/Net Working Capital: This ratio measures how effectively a company uses its working capital to generate sales. A figure of 9.11 in 2021 shows that the company has been effectively utilizing its working capital to generate sales.

  7. Assets/Sales: This ratio indicates how efficiently a company uses its assets to generate sales. A figure of 20.87% in 2021, down from 160,903.41% in 2020, shows a significant improvement in asset utilization efficiency.

  8. Profit Margin: This ratio measures how much out of every dollar of sales a company keeps in earnings. A profit margin of 10.08% in 2021 shows that the company is profitable, which is a positive sign for the exporter.

  9. Shareholders Return: This ratio measures the profitability of a company from the perspective of the shareholders. A figure of 97.85% in 2021 shows a high return for the shareholders, indicating the company is generating significant profits.

  10. Return on Assets: This ratio measures how profitable a company is relative to its total assets. A value of 48.29% in 2021 indicates a high level of profitability, which is a positive sign for the exporter.

The ratios above indicate that the importer's financial situation has improved significantly over the years. However, the heavy reliance on short-term financing could be a potential risk factor. The exporter should ensure that they have adequate measures in place to manage this risk, such as credit insurance or letter of credit payment terms.

Source: Image extracted from the DNB Report generated by the Exporter prior to dispatching the Shipment to the Buyer.

The provided comparatives offer a historical overview of the importer's financial health and operational performance. Let's analyze each one:

  1. Turnover: Also known as sales, it represents the total revenue that a company brings in during a specific period. The company has seen a massive jump in turnover from 88k HRK in 2020 to 128,127k HRK in 2021. This indicates substantial business growth, which can be promising for the exporter.

  2. Pre-tax Profit: This is the profit a company makes before paying corporate tax. It’s seen a steady increase over the years, with a significant jump in 2020 and 2021. This indicates the importer's improving profitability, which is good for the exporter.

  3. Net Worth: This represents the company's total assets minus its liabilities. The net worth has significantly increased from -277k HRK in 2019 to 13,200k HRK in 2021, showing improved financial health.

  4. Fixed Assets: These are long-term tangible assets that a company uses in its operations to generate income. The company has steadily decreased its fixed assets from 2,985k HRK in 2018 to 0 in 2021. This could imply a shift in business model or increased asset efficiency, but it could also suggest a lack of investment in long-term infrastructure.

  5. Total Assets: This includes everything the company owns. The total assets have decreased from 141,595k HRK in 2020 to 26,745k HRK in 2021. This drastic decrease might be due to selling assets or depreciation, which could potentially be a red flag for the exporter.

  6. Current Assets: These are assets that a company can easily convert to cash within one year. The current assets have decreased significantly in 2021, mirroring the trend in total assets.

  7. Current Liabilities: These are the company's debts or obligations that are due within one year. The current liabilities have decreased from 125,849k HRK in 2020 to 12,678k HRK in 2021, indicating improved short-term financial health.

  8. Working Capital: This is the difference between a company's current assets and current liabilities. An increase in working capital suggests the company has more short-term liquidity to cover its immediate obligations.

  9. Long Term Debt: These are debts that are due more than a year out. A decrease in long-term debt is usually a good sign as it reduces the company's financial risk.

  10. Financial Assets and Intangibles: These have remained at 0 across the years, suggesting the company does not hold any financial instruments or intellectual property.

  11. Employees: The company had one employee in 2021, which is the first time it's listed any employees. This could suggest a very lean operation, possibly outsourcing many functions.

The comparatives indicate that the importer has experienced significant growth in turnover and profitability, which is generally a positive sign for the exporter. However, the drastic decrease in total and current assets, along with the lack of investment in fixed assets, could potentially be a concern. It would be beneficial for the exporter to understand the reasons behind these changes to make an informed decision.

Source: Image extracted from the DNB Report generated by the Exporter

Understanding the balance sheet of a potential partner is crucial in the import-export business. It allows you to determine their financial health, risk level, and growth potential. Below, I'll break down key aspects of this balance sheet, explain their implications for you as the exporter, and provide advice.

Assets

Fixed Assets: These are long-term assets a company uses for its operation and doesn't convert into cash during one year. The significant increase in 2018 indicates a major investment, potentially in machinery or property. It's usually a positive sign indicating expansion. However, the rapid decrease from 2020 to 2021 could mean they sold these assets, possibly to free up cash due to financial difficulty.

Current Assets: These are assets that can be converted into cash within one year. The drastic increase in 'Stock' and 'Trade Debtors' from 2019 to 2020 suggests higher sales volume and possibly extending more credit to customers. However, the sharp drop in 2021 may indicate a slowdown in business or potentially stricter credit terms, which could be a red flag.

Liabilities

Net Worth: This is the total assets minus total liabilities. It's positive from 2020, indicating the company has more assets than liabilities and is potentially financially stable. However, the fluctuation before 2020 suggests a volatile financial position.

Current Liabilities: These are obligations due within a year. The large 'Trade Creditors' and 'Bank Overdraft' amounts suggest the company relies heavily on short-term debt to finance its operations.

Mortgages/Loans: The lack of long-term debt could indicate either low leverage, which is good, or possibly difficulty in securing long-term financing, which could be a concern.

Profit & Loss

Net Sales: This represents the company's revenue. The drastic increase from 2020 to 2021 shows a significant growth in business, which is a positive sign.

Gross Profit: The company's income after subtracting the cost of goods sold. Positive gross profit in 2021 indicates that the company's sales exceed its cost of goods, a good sign.

Net Profit: This is the company's bottom-line profit after all expenses and taxes. The company started making profits from 2020, which is a positive sign.

Pros and Cons for Exporter

Pros:

  1. The company's current growth trend: The company's net sales have drastically increased, indicating growth.
  2. Financial stability: The company has more assets than liabilities from 2020, indicating financial stability.

Cons:

  1. Reliance on short-term debt: The company relies heavily on short-term debts, which could indicate potential cash flow problems.
  2. Volatility: The company's financial position has been quite volatile over the years, indicating potential instability.

Advice

Given the company's growth trend and financial stability from 2020, they could be a viable partner. However, their reliance on short-term debt and past volatility suggest potential risks. It would be prudent to:

  1. Negotiate shorter payment terms initially, to mitigate potential default risk.
  2. Regularly monitor their financial health to avoid sudden surprises.
  3. Consider securing trade credit insurance to protect against non-payment.
  4. Conduct thorough due diligence, perhaps seeking more information about the causes of their financial volatility.

Remember, all financial information must be considered as a whole, and any decision should be based on a comprehensive evaluation.

So, what are the essential practical inquiries to consider? How do these financial figures and ratios impact your export decisions? If these are the questions swirling in your mind, we invite you to reach out to our team at Barai Overseas Export Import Consultation. Our experts are equipped to answer your queries, offer personalized advice, and provide guidance tailored to your specific needs.

With our expertise, you can transform this financial jargon into a strategic blueprint for your export business. Our goal is to empower you to navigate the complexities of international trade with confidence and ease. Reach out to us today, and let's embark on the path to export success together.

Remember, with the right knowledge and the right partner, you can make well-informed decisions and attain a prosperous experience in the export-import arena. Let us be your Export Import Guru guiding you on this journey.

Reach out to us today to book your consultation!

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