why financials matter balance sheet – income statement

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Why Financials Matter Balance Sheet – Income Statement

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Page 1: Why Financials Matter Balance Sheet – Income Statement

Why Financials MatterBalance Sheet – Income Statement

Page 2: Why Financials Matter Balance 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

Page 3: Why Financials Matter Balance Sheet – Income Statement

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

Page 4: Why Financials Matter Balance Sheet – Income Statement

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

Page 5: Why Financials Matter Balance Sheet – Income Statement

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

Page 6: Why Financials Matter Balance Sheet – Income Statement

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