How to Read Your Financial Statements

 

https://www.youtube.com/watch?v=3jVAgr7mq9E

Never use Short term fund to use long term assets. It is suicidal.  You can't use a one year loan to buy a home. Then you will have to sell the long term asset. 

Working capital should not be used to buy long term assets - never swipe credit cards to buy long term assets. 

Current Ratio should be 2:1 or 2.5:1

There is another ration inside this called Liquidity or Quick ratio. 

Inventory, Cash and Bank Balances and Debtors are parts of Current Assets.  Of these three, Inventory is one which has no guarantee. 

Liquid is only Cash and Bank and Debtor. It should be 1:1.

Working Capital Cycle - 

Less is bad, more is worse. 

Leverage is deep and fascinating topic. To have a leverage you need to have Debt. 

Fulcrum is Fixed cost, that leads to leverage. Operating fixed cost will lead to operational leverage and financial fixed cost leads to financial leverage. Debt/interest is financial leverage. 

Companies with operational leverage is given. Financial leverage should react. If operational leverage is high, they should avoid debt. If operating leverage is low you can go for debt. 

Ratio's can be compared in two ways: Inter company and Intra company. It is meaningful only when we compare. 

Revenue minus Direct cost is Gross Profit. 

Good will/Brand Value are misunderstood items. 

Know that in your Balance Sheet you will never have your own Good will. 

Asset side is what you have purchased. You have paid someone else. 

You good will is in the Balance sheet of the buyer. 

So it is the worst item to have in your balance sheet. 

Return on Capital Employed is a key ratio ignored. Bank's will take care of Debt service coverage ratio. 

Profit margin vary from 8% to 18%. But I say don't invest until I can earn 50% return. 

To increase profit, improve the cycle not the margin. 

Business runs for bottom line and not top line. Top line is also important, without it there would be no bottom line.  Top line should be that with which bottom line is positive. 

Bottom line is Net profit and Semi bottom line is Operating profit - which is more important. Consistency comes from Operations. 

Bottom line we might manipulate for Tax. 

What is more important? Profit or Cash - Both. 

1. Ability to generate profit

2. Ability to manage Cash

Are the two pillars of business. 

Make Financially intelligent decision. This should be ultimate aim of every business. 

Key things to take care of when reading a cash flow are:

Red flag is having free cash. 

Requirement, pain area are all same globally. 

Blue Ocean: Corporate Finance.