Investigating Financial Statements
• Calculate Key Indicators (Ratios) o Solvency & Liquidity
• Solvency and Liquidity ratios measure the company’s ability to pay its short-term obligations. They measure the quality and adequacy of current assets to cover current liabilities • Current Ratio = Current Assets / Current Liabilities • Measures the company’s ability to pay its current liabilities with current assets • Low ratio means the company may have difficulty meeting its short-term obligations • High ratio may indicate an excessive investment in current assets
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Investigating Financial Statements
• Calculate Key Indicators (Ratios) o Safety & Coverage
• When you examine the safety of the company you are examining its perceived risk by outsiders such as bond underwriters, bankers, and others. • Debt to Equity = Total Liabilities / Equity • Measures the amount of investment made by the Owners versus outsiders • Typically not to exceed 4 to 1
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