Financial Ratios This means that equity costs more than debt, because of this higher payout. So for the company, debt also has the advantage of being cheaper than equity.
There are a number of financial ratios that will be valuable to a small business person. A small business is often concerned with cash flow, so ratios that are the most concern fall into three categories -- liquidity, profitability and efficiency. Liquidity ratios measure the ability of the company to meet its upcoming financial obligations. These ratios are important for ensuring that there is enough cash on hand to pay the bills. The profitability ratios are important because the business will be more successful if it is able to manage its margins. Efficiency ratios are concerned with how fast items like inventory or accounts receivable are turned over. These ratios are a direct reflection of the company's working capital, and improvements in these ratios improve the working capital flow.
These ratios are going to be slightly different from those that a large corporation values. The large corporation actually does value these three ratio categories, but has others that it needs to concern itself with as well. Investment return ratios are more important -- ROA, ROE -- and so are market ratios like earnings per share. For a small business, however, there are no shareholders, and the most important concern is to ensure sufficient cash flow to meet obligations and ensure that the business continues. IF the company is growing, then cash flow remains important because of the need to plow money back into the business.
2. Debt financing has a number of advantages over equity financing. The most important is that for a business owner, debt financing allows the owner to retain control over the business. Equity financing means giving up a share of ownership, so debt financing avoids that. Also, debt financing is cheaper than equity financing. The reason is that debt is paid before anything is left for the shareholders. To compensate for being subordinated, the shareholders demand a higher payout on their ...
The downside of debt financing is that it creates an obligation. The company will need to pay interest on that debt, and will eventually pay the principle as well. This payment comes before any profits can be distributed. As a result, the company will pay the interest before it has money left over to re-invest back into the business. If the company is losing money, it would not need to pay anything to equity holders, but it will still need to make a payment to the bondholders. This obligation can constrict the ability of the company to invest what it wants into the business, especially if the company has a lot of debt. This is why banks are usually wary of lending to companies that have high debt levels -- the higher the debt the greater the risk that the business will not be able to generate sufficient cash flow to cover the debt obligation.
Another disadvantage of debt is that there are often restrictive covenants on the debt. If borrowing from a bank in particular, the bank will impose these covenants a as means of protecting its investment and the company might agree to the covenants in order to lower the interest payments. Sometimes, however, the covenants can be onerous. They usually involve things like maintain healthy liquidity ratios, and have a minimum standard for free cash flow / interest expense or similar ratio. However, trying to maintain operations within the context of these covenants can be a nuisance for the business. A company might decide that the disadvantages outweigh the advantages with respect to issuing debt, and prefer to issue equity instead. Additionally, an especially attractive firm can often raise a substantial amount of equity with an IPO. Further, if the equity comes in the form of venture capital, this might be seen as preferable because the venture capitalist will be able to bring in some outside managerial expertise in order to help the…
This means that equity costs more than debt, because of this higher payout. So for the company, debt also has the advantage of being cheaper than equity.
This means that Apple is generating more cash internally than Google. Further, given the increase in cash flows from operations in the case of Apple means that the company could have an enhanced value of net income in future. When it comes to cash flows from investing activities, there is an increase in the same in the case of Apple in the current financial year in comparison to the
Financial Risk The financial ratio categories are Liquidity, Activity, Profitability, and Coverage (Kieso, Weygant, & Warfield, 2008). These ratios are comparisons of different financial accounts that show financial performance measures in different areas. Fluctuations of these ratios can be red flags. These fluctuations can show increases or decreases in performances. Increases could indicate growth, but decreases could show negative signs in performance levels that need to be analyzed and addressed. Liquidity,
This ratio eliminates the stock figure from that of current assets and like the current ratio; it is used to measure the liquidity of a firm. The quick ratio may in some instances be preferred over the current ratio as it is inherently difficult to turn some assets into cash. In regard to the two companies, the quick ratio brings out Plume Inc. As being more risky as it
Financial Ratio Analysis for Xerox Xerox Corporation is company in the field of technology and services, which is currently developing, manufacturing, marketing, and financing a whole range of document equipment, software, integrated solutions and services. They have a global network, with branches in more than 130 countries all over the world. In America, its products are distributed through divisions, subsidiaries and third-party distributors. In the rest of the world (Europe, Africa,
Therefore, I do believe that qualitative research is necessary. The financial statements can reveal much, but there are definitely instances in which the financial statements require contextual understanding for proper interpretation. Without this understanding, the firm's numbers may only reveal raw data. Raw data can be interpreted any number of different ways, so it is essential that qualitative analysis be conducted in order to place the numbers within a framework
financial analysis and more specifically financial ratios has been noted by Finkler, Marc and Baker (2007, p.253) to be important to managers since it can help them in making informed decisions. In this paper, we present the concept of ratio analysis as applied to healthcare facilities. The concept and purpose of ratio analysis Financial statement analysis is noted by Flex Monitoring Team (2005) to be very important to managers, boards, payers