Fin 571

Interpreting Financial Results

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FIN/571 Corporate Finance

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Business owners and entrepreneursuse financial ratios as a measuring analysis tool for management performance and benchmarking.Financial ratios include asset turnover, liquidity,calculations inprofitability, and financial leverage. Liquidity ratios aid business managers in determininghow well their business can satisfyshort-term financial responsibilities. Asset turnover ratios show indicators that inform managers how well the business uses assets to create sales in revenue. By calculating the financial leverage of a business, that business will know it’sthe long-termresponsibility. When calculated, profitability ratios show the individual profitsthat are earned from a good or service.

The main reason businessescreate a balance sheet is to find out the business working capital(capital that sustains the business). Working capital also refers to the “current position” of a business. Abovethe other calculations, working capital reveals more about the financial state of a business (Kennon, 2013). When a business pays attention to the working capital, that business can locate any difficulties that may surface. It tells the business what would be retained if a business increased all of its short- term resources, and used those resources to pay back its short- term liabilities. The more working capital a business has, the less financial stress it experiences. The formula for working capital is Current Assets - Current Liabilities = Working Capital. The working capital in the sample financial statements for 2010 and 2009 are the following:

$21374000-$9815900= $11558100 for 2010

$20769000-$11667000=$9102000 for 2009

Based off of this data, the working capital in 2010 was higher.

Capital (start up capital) is something that a businesshas possession of and those possessions are used to make wealth. Capital can be assets such as cash (liquid assets), or it can be...