Question

Explain how the analysis of financing options, investment activities, and operational activities can be used as metrics for a assessing a company’s financial health. Include examples of how you might measure these activities using the information company’s financial statements, accounting standards, and publically available industry data.

Answer 1

Before making an Investment, an Investor shall consider various aspect of a Company. These include the basic fundamentals like Book Value per share, Earnings per share, Price to earning ratio, Quartely and Annual Performance, Financing Options and amount of finance, Debt-Equity ratio, Investment Activites, type of investments holding, and day to day operational activities.

a. Financing Options: It is important to consider the Debt-Equity ratio of any entity. It also defines the Financial Leverage the entity is enjoying. Debt and Equity form the basis of Capital Requirement of an entity. Buy higher the debt, higher will be the Interest Burden on the entity. Hence, it shall employ Debt and Equity in the correct proportion.
Generally a Debt: Equity Ratio of 2:1 is considered appropriate. However, this varies from industry to industry.

Various Financing Options are Equity Capital,Bank Mortgage, Loans, Bonds raised in National and International Markets.

b. Investment Activities: An Entity may hold substantial amount of Non trade Investment. Trade Investment are strategic Investment made relating to Trade. Investment in Land and Building, Plant and Machinery etc may be measured through the Cash Flow Statement of the entity.

c. Operational Activities: Day to day functioning of the regular trade activities. How the company is carrying on the business, the net profit and gross profit rations, return on equity, growth in revenues and profit etc, all shall be measured before making any Investment.

All these can be measured through study of the Annual or Quarterly Financial Statements of the Company which include Balance Sheet, Statement of Profit and Loss, Cash Flow Statement and Statement of Changes in Equity and related notes to Accounts.