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.
In mathematical terms financial result is defined as follows:
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.
financial result =
+ interest income - interest expenses +/- write up and write down for financial assets +/- write down and write up for marketable securities +/- other financial income and expenses
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.
- Wiehle, Ulrich, Henryk Deter, Michael Rolf, Michael Diegelmann, Peter Noel Schomig. 100 IFRS Financial Ratios (Cometis AG), 2005, ISBN 978-3-9809461-7-9
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