Financial result

What it means

The financial result is the difference between financial income and expenses: interest, exchange differences, income from securities and shareholdings, bank charges or revaluation of financial assets. It shows how the business is affected by the way it is financed and invests spare cash.

In the profit and loss statement it is shown separately from the operating result, which reflects core activities. Together they make up profit before tax, from which net profit is reached after deducting tax.

For most companies the financial result is negative because they pay loan interest and bank charges. It is positive for companies with large cash balances, holding companies receiving dividends from subsidiaries, or when exchange rates move favourably.

How it works in practice

Analysing the financial result helps separate business performance from the effect of financing. A company may have a good operating result but see high interest on debt eat its profit, which signals a need to refinance or reduce net debt.

For companies trading in foreign currencies, exchange differences can fluctuate sharply and distort year-on-year comparisons. When assessing results, it helps to know how much of the financial result consists of unrealised exchange differences from translation at the balance sheet date.

Interest on loans between related parties must reflect market terms. Where interest costs to related parties are high, their deductibility may be limited by thin capitalisation rules that tie interest deductions to EBITDA.

What to watch out for

One-off financial transactions, such as selling a shareholding or revaluing an investment, can raise or lower the result significantly without any link to ordinary activities. Banks and investors therefore often exclude them in their analysis.

Charges for card terminals, cards or banking services are sometimes booked as financial costs and sometimes as services. For comparability over time they should be booked consistently, and when comparing with other companies you need to know where they classified them.