Question

ch14 How do you diagnose a company's financial status.

Answer 1

Primarily, to diagnose a company financial status, an individual can undertake various financial analysis techniques. Measuring a company`s liquidity, solvency, operational efficiency, one can easily examine the financial status of the company. The term liquidity means the amount of cash the company possess to pay of its debts and other obligations. Solvency means ability of a company to meet its liabilities on an on-going basis. The term operational efficiency indicates how well the company control its costs. Lastly, profitability refers to the amount of profit after paying of all expenditures and taxes.

In addition to that, a company`s financial status can be diagnosed by employing various financial analysis techniques. Basically, there are four common financial analysis methods and they are as follows:

• Horizontal Analysis

It involves evaluation of a company`s financial data through comparison of results and to determine the year-on-year changes.

• Vertical Analysis

It refers to measurement of company financials over a period of time.

• Trend Analysis

This technique is used to identify increase or decrease over a period of time in financial statements.

• Ratio Analysis

This is a common analysis technique employed to identify liquidity, solvency, turnover and profitability of a company. For example: Current Ratio, Debt-Equity Ratio, Stock Turnover Ratio, Net Profit Ratio etc.