If you want to find out the financial health of a company - or even your own - there are two good ways to do it. To get started, gather financial statements (including balance sheet, income statement and a statement of cash flow) for the last five years of the company you want to review. Once in hand, you can utilize two key ratios to spot trends that will tell you how that company is doing financially compared to others.
#1: Assets vs. Debt
One key ratio to determine is the current ratio, which compares the assets a company plans to use over the next 12 months with the debts that it must pay during the same period. By calculating the current ratio for each company you are considering, you will know if the company is able to pay its bills over the next year with the cash it has on hand.
To calculate the current ratio, divide the current assets of the company by the current liabilities, which can both be found on the company’s balance sheet. A rule of thumb is that any current ratio between 1.2 and 2.0 is sufficient for a company to operate. (Any ratio above 2.0 might indicate that the company is not investing its excess cash properly.)
#2: Return on Assets
A second helpful ratio you can quickly calculate is the return on assets. This figure will show how much income is being produced given the assets the company can employ. To determine return on assets for each company, divide the net income (from the income statement) by total assets (from the balance sheet).
By calculating and comparing the financial ratios of companies, such as the current ratio and return on assets, you can better understand a company’s financial position.
To learn more, register now to attend “Understanding Finances (When You Never Wanted to be a CPA)." The Michigan Chamber seminar will be led by Ted Janusz, a national speaker, trainer, motivator, facilitator, and former entertainer, with an MBA in Marketing from the University of Pittsburgh. Janusz has delivered over 750 full-day seminars in 49 of the 50 United States, from Halifax to Vancouver, and in Australia and Puerto Rico. His work has been featured on sites like BusinessWeek.com and MSNBC.com.
“Understanding Finances (When You Never Wanted to be a CPA)" will be held on May 9, 2018 in Lansing.