Financial Documents & Important Ratio – Part1
Since last couple of months equity market is
not performing well. It has come down from 6100 to 5500 range. Some good
companies is available in very cheap valuation. It is very important to know
about the company’s financial health before investing. But how we can know
about financial health of company? Let us discuss about some important
financial documents and some other important ratio of the companies.
There are mainly three documents from which we
can fetch data for analysis. When we combine these all data it give the full
financial scan of any company.
(A) Balance Sheet
(B) Profit and Loss Account
(C) Cash Flow Statement
(A) Balance Sheet: It is snapshot of the assets used by the company and the funds that are
related to those assets We can get it in fix interval like yearly, quarterly or
monthly and asses how the assets and funds change within the interval and know
whether it is good for company or not.
(B) Profit and Loss account or P/L account: It measures the gain of losses from normal
operations over a period of time. It also measures total income and deduct
total cost. It get the some value from balance sheets.
(C) Cash Flow Statement: When company receive the cheques it is called cash
flow in and when company issue the cheque to someone then it is called cash
flow out. It includes other financial instruments also. It also linked to
balance sheet and P/L account.
Here we have to discuss about some ratio also.
So we will discuss about balance sheet in detail our forth coming blog. Some
important business ratio are also
important to know.
Acid-test ratio: The ratio of current assets less inventories to total current
liabilities. It shows how much the company’s short term debt can meet by
selling all of the company’s liquid assets at very short notice.
Cash asset ratio: It can get total value of cash and marketable securities divided by
current liabilities. It measures the extent to which a company can liquidate
assets and cover short term liabilities.
Current ratio: Current assets divided
by current liabilities. It indicate the company’s ability to meet short term
debt obligations.
Debt/asset ratio: It comes from total liabilities divided total assets. If it less than
one, most of the company’s assets are financed by equities and if it is more
than one it means the most of the company’s assets financed by debt. Company
with high debt/asset ratio consider risky it means if creditors demand
repayment company can go in danger.
There are many other ratios which is also very
important which we will discuss in next part.
For more detail about any other query related investment, you can contact
me through my email.
Regards,
Arvind Trivedi
Certified Financial Planner
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