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Financial statements and ratios.

Financial statements and ratios are essential tools for analyzing the financial health and performance of a company. These documents provide insights into a company's profitability, liquidity, solvency, and overall financial stability. Here's an overview of financial statements and commonly used financial ratios:

Financial Statements:

  1. Income Statement:

    • Also known as the profit and loss statement.
    • Summarizes revenues, expenses, and profits over a specific period (e.g., quarterly or annually).
    • Key components include revenue, cost of goods sold (COGS), gross profit, operating expenses, net income, and earnings per share (EPS).

  2. Balance Sheet:

    • Provides a snapshot of a company's financial position at a specific point in time.
    • Includes assets (current and non-current), liabilities (current and non-current), and shareholders' equity.
    • The accounting equation is Assets = Liabilities + Equity.

  3. Cash Flow Statement:

    • Tracks the flow of cash into and out of a business.
    • Consists of three sections: operating activities, investing activities, and financing activities.
    • Highlights how changes in balance sheet accounts and income affect cash and cash equivalents.

Financial Ratios:

  1. Liquidity Ratios:

    • Measure a company's ability to meet short-term obligations.

    • Current Ratio:

      • Current Assets / Current Liabilities.
      • Indicates the company's ability to cover short-term liabilities with short-term assets.

    • Quick Ratio (Acid-Test Ratio):

      • (Current Assets - Inventory) / Current Liabilities.
      • Measures the company's ability to cover short-term obligations without relying on the sale of inventory.

  2. Profitability Ratios:

    • Assess a company's ability to generate profits.

    • Net Profit Margin:

      • (Net Income / Revenue) * 100.
      • Indicates the percentage of revenue that translates into profit.

    • Return on Equity (ROE):

      • (Net Income / Shareholders' Equity) * 100.
      • Measures the return generated for shareholders' investments.

  3. Efficiency Ratios:

    • Evaluate how effectively a company utilizes its resources.

    • Inventory Turnover:

      • Cost of Goods Sold / Average Inventory.
      • Measures how quickly a company sells its inventory.

    • Days Sales Outstanding (DSO):

      • (Accounts Receivable / Total Credit Sales) * Number of Days.
      • Measures the average number of days it takes for a company to collect payment from customers.

  4. Solvency Ratios:

    • Assess a company's ability to meet long-term obligations.

    • Debt-to-Equity Ratio:

      • Total Debt / Shareholders' Equity.
      • Indicates the proportion of debt to equity financing.

    • Interest Coverage Ratio:

      • Earnings Before Interest and Taxes (EBIT) / Interest Expense.
      • Measures a company's ability to cover interest payments with operating income.

  5. Market Ratios:

    • Provide insights into how the market values a company.

    • Price-to-Earnings Ratio (P/E):

      • Market Price per Share / Earnings per Share (EPS).
      • Indicates the market's expectations for a company's future earnings.

    • Dividend Yield:

      • Dividend per Share / Market Price per Share.
      • Measures the dividend income relative to the market price of a share.

Financial statements and ratios are valuable tools for investors, analysts, and stakeholders to assess a company's financial health, make informed investment decisions, and understand its operational efficiency and profitability. These metrics are often used in combination to provide a comprehensive view of a company's financial performance.

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