Financial Analysis

Total Current Assets - Total Current Liabilities

Comment: The net working capital is the capital available in the short term to run the business.

The IAS/IFRS rules of financial equilibrium require that current assets exceed short-term debts so that short-term debts can be repaid thanks to the receipts from current assets. The firm should satisfy this rule of financial equilibrium. Firms with low (or negative) net working capital may face a shortage of funds unless they generate sufficient cash from their ongoing activities.

Amphi 1

Market Value of Equity* + Interest-Bearing Liabilities** - Cash

Measure of the economic value of a company. Frequently used to determine the value of a business if it is acquired. Considered to be a better valuation measure for M&A than market cap. Takes into account the debt an acquirer would have to assume and the cash they would receive. EV can be interpreted as the cost to take over a business. Therefore, it would cost # to buy all of the firm's equity and pay off its debts #, but because we would also take over the firm's cash #, the net cost of the business is only #.

*Market Cap // **All liabilities except Accounts Payable

Amphi 1

Market Price per Share x Number of Shares Outstanding

A firm's market capitalization measures the market value of the firm's equity.

Amphi 1

Financial analysts often use the information in the firm's balance sheet to assess its liquidity. Assesses whether the firm has sufficient working capital to meet its short-term needs.

Liquidity = company's ability to meet its short-term obligations. Debitors' ability to pay off current debt obligations without raising external capital. One can be solvent but can lack liquidity: Assets are liquid if they are either immediately accessible or easily converted into usable funds; Cash is considered the most liquid payment vehicle.

Amphi 1

Total Current Assets / Total Current Liabilities

The range of acceptable current ratios varies depending on the specific industry. But overall...

• A ratio value lower than 1: potential liquidity problems for the company unless the firm is able to secure other forms of financing.
• A ratio between 1.5 and 3: healthy. Company is able to pay off all its debts once they become due.
• A ratio over 3: not using its current assets efficiently or is not managing its working capital properly.

Amphi 1

(Cash and Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities

Compares only cash and "near-cash" assets, such as short-term investments and accounts receivable, to current liabilities. A reason to exclude inventory is that it may not be that liquid.

The firm may have a risk of experiencing a cash shortfall in the near future if under 1.

Amphi 1

Quick Ratio excludes inventory and other current assets (such as prepaid expenses); because they are generally more difficult to turn into cash.

The Current Ratio considers inventory and prepaid expenses assets.

Inventory takes time to liquidate, although a few rare companies can turn their inventory fast enough to consider it a quick asset.

Prepaid expenses, though an asset, cannot be used to pay for current liabilities.

Amphi 1

Cash / Total Current Liabilities

The most stringent liquidity ratio. Under 1, means poor liquidity.

Amphi 1