Financial result explained

The financial result is the difference between earnings before interest and taxes and earnings before taxes. It is determined by the earning or the loss which results from financial affairs.

Interpretation

For most industrial companies the financial result is negative, as the interest charged on borrowing generally exceeds income from investments (dividends). If a company records a positive financial Result over several periods, then one has to ask how much capital is invested at which interest rate, and if this capital would not bear a greater yield if it were invested in the company's growth. In case of constant, positive financial results a company also has to deal with increasing demands for special distributions to its shareholders.

Calculation formula

In mathematical terms financial result is defined as follows:

style{\begin{align} Financialresult & = Interestincome \ & - Interestexpense \ & \pm Write-downs/write-upsforfinancialassets \ & \pm Write-downs/write-upsformarketablesecurities \ & + Otherfinancialincomeandexpenses \end{align}}

Advantages

The advantages of the use of financial result as a key performance indicator

• The financial result provides information about financing costs.
• Information may be gained about non-consolidated companies.

Disadvantages

The disadvantages of the use of financial result as a Key performance indicator

• Operating components may be included in the financial result (e.g.: the income from financing activities).
• Investment income as a component of the financial result does not provide any information on the risk inherent in this investment.
• The financial result may vary strongly over time.

References

• Wiehle, Ulrich, Henryk Deter, Michael Rolf, Michael Diegelmann, Peter Noel Schomig. 100 IFRS Financial Ratios (Cometis AG), 2005,