Financial Analysis of the Efficiency of Firm Working Capital Investments: The Rosetta Stone Approach in Financial Efficiency Evaluation

Posted: 19 May 2014

See all articles by Grzegorz Michalski

Grzegorz Michalski

Technical University in Košice (TUKE); Uniwersytet Ekonomiczny we Wrocławiu - Faculty of Engineering and Economics

Date Written: May 12, 2014


Financial Analysis of the Efficiency of Firm Working Capital Investments. The Rosetta Stone Approach in Financial Efficiency Evaluation. Counterpart rating is a complex and important process. It is performed by the company on a regular basis, and - whether succeeding or whether our actions will end in failure - largely depends on it. On the one hand we are very concerned for obtaining customers. On the other hand, if we establish relationships with inappropriate actors, it may end badly. Contractors need to be assessed at the "start" (suppliers of materials and raw materials for production) and the end (the recipient of our products and services).

In assessing the contractor's company, we often use the information that he wants us to provide. They are therefore usually dependent on the documents that define the contractor’s activities as an entrepreneur and in their form. Economic activity (according to the Bill of 19 November 1999 Law of economic activity) is, for economic reasons, carried out in a structured and ongoing activity of manufacturing, commercial, construction, services, and search, exploration and exploitation of natural resources.

The feature of continuity of economic activity means that it cannot be done incidentally, but may be seasonal. Entrepreneurs are three categories of subjects: physical entities, legal persons and companies without legal personality of commercial law, who professionally and on their own behalf undertake and carry out economic activities. Entrepreneurs are now considered as members of a civil company (since 1 January 2001 entrepreneur was a company and not its shareholders) to carry out their business. Contractor assessed by us can carry out his activities in several basic forms: single company, companies, cooperatives. Most information can be expected from the company conducted on the basis of commercial law, such as a company or partnership, partnership, limited partnership, limited-partnership, limited liability company (referred to as Sp. z o.o. ltd), or joint stock company (hereafter SA). Depending on who is our contractor, we can expect from him other data. Financial and statistical reports are produced by the company depending on the legal form of its activity. Full accountancy concerns firms that pay income tax on individuals and legal persons determined by the records kept in accordance with the Accounting Act. The provisions of the Accounting Act apply, inter alia, to those established or to exercise the board on Polish territory: the commercial companies (personal and capital, including the organizations) and civil partnerships (subject to paragraph 2, as well as other legal persons, with the exception of the Treasury and the Polish National Bank) individuals, civil partnerships of individuals, partnerships of individuals and partner companies, if their net revenues from the sale of goods, products and financial operations for the previous financial year amounted to at least the equivalent of EUR 800 0001 in Polish currency.

In case the evaluated contractor does business - whatever its form, you can expect additional documents such as a certificate from the Tax Office about lack of overdue tax (if it is up-to-date, not older than e.g. 30 days, this informs us that the contractor complies its obligations to the Tax Office if you have any arrears to the budget, it can be concluded that this is a very suspicious case, and this should be taken as a warning signal), a certificate from ZUS about lack of overdue insurance contributions (if it is up-to-date, no older than eg 30 days, has a similar meaning as a certificate from the Tax Office and our counterpart is some backlog in this respect, it can be concluded that this is a warning signal for the evaluation of the counterpart). With business using revenue and expense ledger, it is possible to ask for: company registry documents (REGON, NIP, the entry in the records of a business), a copy of the company agreement (on the basis of which you can sometimes find out that the person who signs with us some contract has no authority to do it), a copy of the PIT-36, confirmed by the Tax Office for the last two years, PIT-5, confirmed by the Tax Office from last month, a copy of the revenue and expense ledger from last month, a certificate from the Tax Office on derived income (not older than 30 days), authenticating that our contractor as an entity wishing to establish or continue the cooperation with us. If a contractor operates with a full accountancy, in addition to the above, we ask for a copy of the balance sheet F-02 for the last year, a copy of the declaration of the F-01 for the last year confirmed by the Tax Office, a copy of the CIT for the last year confirmed by the Tax Office. If your contractor is established on the basis of a lump sum, it is worth to supplement the documentation with a copy of PIT-28 for the last two years, confirmed by the Tax Office, a certificate of costs incurred and revenue performance (contractor’s own statement), certificate from the Tax Office for income derived (not older than 30 days). If our contractor does business with the use of a tax card, in addition to the aforementioned we obtain a copy of the decision from the Tax Office to grant the amount of your tax for the current year, a statement of costs incurred and income performance (contractor's own statement). Deciding on counterpart is not an easy task. In principle, any concluding on the counterpart bears the risk of errors in the assessment, even if it is carried out in accordance with all standards. Counterpart rating on the basis of information contained in the reports should be treated as one element of the whole puzzle. It must be considered as a basis for further, deeper analysis. This is because this tool is far from perfect. We can imagine the difficulty of this task, if we compare the actual state of the literary work, part of which is displayed, and the rest has to be guessed. Although the work may be the most inspiring of those we know, on the basis of fragments visible to us, we cannot say this for sure. At the same time, it is possible for us to see parts, which promise more than the same piece is worth.

The purpose of this guide is to present the most useful, known to the author tools that can be used to assess the counterpart. One should always remember that at no stage one couldn’t fail to intuition and managerial experience of the assessor. Counterpart rating is an art, not a craft. It cannot be made by a computer system without checks and the final decision of the experienced man in the industry.

The guide in the first part deals with the financial objective of the action and essential elements of shaping the financial image of the company's counterpart. The purpose of this section is to show the main elements allowing the contractor to understand why we can behave in a certain way and how to interpret this behavior of the contractor and what the will be the reflection in the information we receive from the counterpart.

The second part deals with a discussion of the financial reports of the contractor and the main conclusions that one can try to draw from them. The third part is devoted to the indicator analysis of with respect to those indicators, which often can help to assess the contractor. Since the indicator assessment itself is not enough to conclude, the fourth and fifth section describes two cases of contractors (this list could be extended, of course), recipients and providers. Counterpart rating of the user using deferred payment is based also on how accepting even the weaker counterparty affects the value of the company if the assessment is related to an increase in sales. Counterpart-supplier rating is also based on its impact on the value of the evaluating unit firm. Both approaches take into account a number of information from outside of the financial statements resulting from the contractor's bid. At the end one can find the appendix in the form of the basics of financial mathematics used in the course of the discussion contained in this guide.

Keywords: Rosetta Stone Approach to Firm Performance Analysis

Suggested Citation

Michalski, Grzegorz and Michalski, Grzegorz, Financial Analysis of the Efficiency of Firm Working Capital Investments: The Rosetta Stone Approach in Financial Efficiency Evaluation (May 12, 2014). Available at SSRN:

Grzegorz Michalski (Contact Author)

Uniwersytet Ekonomiczny we Wrocławiu - Faculty of Engineering and Economics ( email )

ul. Komandorska 118-120
Wroclaw, 53-345

Technical University in Košice (TUKE) ( email )

Letná 1/9
Košice, 04200
+48791214963 (Phone)


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