Written by Adnan Essa
Posted on 02/03/2015

5 tips to read financial statements

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Transparency creates confidence

For a company to trust another, the relationship tends to be based around the element of financial standing. Knowing just how financially stable a company is influences the decision making process of doin gbusiness. The collaboration and trust element arises through openness and transparency. It it through financial statements which leads to more business, more opportunities a lesser degree of risk.

Going to the source of financial statements

Thousands of companies are monitored through a credit reporting agency to determine the factors which determine the outcome of doing business with a company. Here's five tips which should provide you with the 'dummies guide' to reading financial statements.

Tip 1

Calculate the sum of the 'equity' and 'capital'. The result is negative, then beware and ask for additional collateral.

Tip 2

Calculate the 'current ratio'. This calculates the following formula: 'assets' divided by' short-term loans. The outcome is less than 1, then beware. This means that the company can well meet its current liabilities to you as a supplier. A healthy outcome should be greater than 1. The ideal range is between 1.5 and 2

Tip 3

Calculate the quick ratio. This calculates as follows: Current assets minus inventories, and divided by current liabilities. If the outcome is less than one, then be back on your guard. Again, this means that the company can not properly meet its current liabilities. In the quick ratio stocks are not counted because they first have to be converted into cash. That does not always work. It may also be that the stock is sold for an amount less than what it is on the balance sheet.

Tip 4

To make a good analysis of the company, you should have at least three financial statements to compare.

Pay close attention to the the development of equity. If it increases, then there is probably made a profit and added to equity. The same is true for the development of the "reserve".

Tip 5

Calculate the 'capital'. This calculates as: current assets minus current liabilities. Formally, the amount of working capital after repayment of short term debt. In practice, the working capital is the capital that the company may freely to exercise the company tasks. A positive working capital means that there is money to pay you.