Financial statement analysis- Theory questions What does it mean when a company has good financial performance?...

Financial statement analysis- Theory questions

What does it mean when a company has good financial performance? Which financial statement ratios indicate good financial performance and how so?

What does it mean when a company has good investment potential? Which financial statement ratios indicate good investment potential and how so?

Finally what is the difference between good financial performance and good investment potential?

Solutions

Expert Solution

When a company has good financial performance, it means that it has positive working capital, good profitability, higher earnings per share and return on equity, positive debt equity ratio and higher Price-Earnings ratio. The higher current and quick ratios, Higher gross margin, higher EPS ratio, higher Return on equity ratio, higher price-earnings ratios shows and indicates good financial performance of the company.

When a company has good investment potential, it means that company is having a good cash flow to invest through good profitability, higher liquidity, solvency ratios and valuation ratios. The ratios like higher Net income ratio, higher current and quick ratios, good Interest coverage ratio, Positive Debt –Equity ratio and higher Assets turnover ratio shows that company possesses good investment potential.

The difference between the financial performance and investment potential is that good financial performance is where there is good profitability, cash flow and higher net current assets, whereas good investment potential means that company is having good solvency position and credibility to pay-off debts to invest in various productive assets.

ekkarill92 answered 1 year ago

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