1. Why Financials Matter Balance Sheet – Income Statement

2. Liquidity Ratios Current Ratio aka cash asset ratio, cash ratio Current Assets / Current Liabilities = Current ratio 22,575 / 11,725 = 1.92 : 1 Tells us the efficiency of a company's operating cycle (how quick company turns product into cash) Can indicate trouble collecting receivables Long inventory turnover 2:1 ratio is preferred by banks

3. Liquidity Ratios Quick Ratio aka acid-test ratio, quick assets ratio Cash and Receivables/ Current Liabilities = Quick ratio 25,000/ 21,000 = 1.19 : 1 Measures the dollar amount of liquid assets available for each dollar of current liabilities 1:1 ratio means you can pay your currents debts of immediately More conservative than Current ratio – does not include inventory

4. Days of Working Capital (current assets-current liabilities) (total annual expenses/365) (95000-49000) / (150000/365) = 111.9 Current Assets and Liabilities from the Balance Sheet Total Annual Expenses from the Income Statement This company has enough capital to pay bills for 111.9 days

5. About Working Capital Business will have periods (months, quarters, years) of more cash-out than cash-in 30 day minimum – 180 day or more for strong companies. Insufficient Working Capital can be evidence of mismanagement Used to calculate how days to go out of business Used by creditors to determine lending risk

6. Profitability Ratio Net Income / Sales = Return on Sales or Operating Profit Margin 500,000 net income/ 950,000 sales =.53 Data comes from the income statement Tells us how much each dollar earns Use to compare periods and identify trends Should be compared to other companies in same industry Can be used to compare each product for profitability