Question

What are some of the measures used to evaluate the financial stability of a company?

Answer 1

Measures used to evaluate the financial stability of a company:

1) Revenue Growth Rate:  there is stable growth in Sales annually, if there are high level of fluctuations it is not a good sign. Yearly revenue declines should be looked at skeptically and reasons for it should be examined
2)The debt to equity ratio is stable and not too high, there are benefits of leverage, but too much of leverage is detrimental for the company. It should also be compared to the relevant industry standard.
3) Yearly cash balances should be positive. If cash growth rate doesnt correspond to sales growth rate, this might indicate company is not managing its cash properly. If company is not generating cash profit it is a worrysome issue.
4) Profitability ratios . Net Income Ratio and operating profit ratios should be check on year on year basis to determine change in profitability.
5) Return on Investment ratio to compare with industry standard. or it can be used to compare it with Cost of capital, financial health is good if rate of return is higher than cost of capital. Similarly return on equity should be compared with relevant industry. it could also be analysed from investors point of view.
6) Current Ratio, quick ratio to check whether company can meet its short term obligations
7) Debt service coverage ratio to check whether income generated by firm are adequate for servicing debt obligations.