why financials matter balance sheet – income statement
TRANSCRIPT
Why Financials MatterBalance Sheet – Income Statement
Liquidity Ratios
Current Ratio aka cash asset ratio, cash ratio
•Current Assets / Current Liabilities = Current ratio 22,575 / 11,725 = 1.92 : 1
•Tells us the efficiency of a company's operating cycle (how quick company turns product into cash)•Can indicate trouble collecting receivables•Long inventory turnover•2:1 ratio is preferred by banks
Liquidity Ratios
Quick Ratio aka acid-test ratio, quick assets ratio
•Cash and Receivables/ Current Liabilities = Quick ratio 25,000/ 21,000 = 1.19 : 1
•Measures the dollar amount of liquid assets available for each dollar of current liabilities•1:1 ratio means you can pay your currents debts of immediately •More conservative than Current ratio – does not include inventory
Days of Working Capital
(current assets-current liabilities) (total annual expenses/365)
(95000-49000) / (150000/365) = 111.9
• Current Assets and Liabilities from the Balance Sheet
• Total Annual Expenses from the Income Statement
• This company has enough capital to pay bills for 111.9 days
About Working Capital• Business will have periods (months, quarters, years) of more
cash-out than cash-in
• 30 day minimum – 180 day or more for strong companies.
• Insufficient Working Capital can be evidence of mismanagement
• Used to calculate how days to go out of business
• Used by creditors to determine lending risk
Profitability Ratio• Net Income / Sales = Return on Sales or Operating Profit
Margin
500,000 net income/ 950,000 sales = .53
• Data comes from the income statement
• Tells us how much each dollar earns
• Use to compare periods and identify trends
• Should be compared to other companies in same industry
• Can be used to compare each product for profitability