After learning about key financial ratio from the previous article (Key Financial Ratios To Evaluate Companies
), this article will show an example based on the financial statements of CG Oil Company in 2014.
Figure 1 and Figure 2 are a company balance sheet and profit and loss account, respectively.
Figure 1 – CG Oil Company Balance Sheet Continue reading
In order to evaluate a company’s financial health, there are some important ratios which will help investors get a clearer picture of companies.
Current Ratio – It is the current assets divided by the current liabilities in a company. This measures the ability of a company to pay current its liabilities over the next 12 months. Quick ratio should be at least more than 1. If its value is less than 1, it means that a company has insufficient cash to meet short term debts.
Current Ratio = Current Assets ÷ Current Liabilities Continue reading
Every company is required to submit a financial report every year to the government, potential investors, and shareholders to report the financial health of the company and its potential to grow in the future. This section will describe all about a balance sheet, a profit and loss account and some key numbers that you can use to assess a company situation.
A balance sheet is a legal document showing the quantity of a company’s assets and liabilities and it is usually issued at the end of a company’s financial year. However, companies in the stock markets are required to send their balance sheets to the public every quarter. This may depend on the existing regulations of particular countries in which the companies operate. Continue reading
Weighted Average Cost Of Capital (WACC) is a calculation of company cost of capital which is based on a weighted average between debt and equity. Its mathematical expression is listed below;
WACC represents the minimum return on investment that can be a base line for a company to make a decision for new projects. Generally, companies will accept only projects that have returns more than WACC.
This example will use the previous information from Cost of Debt and Cost of Equity article to demonstrate WACC calculation.
The Cost of Equity is an investment return which a company offers its shareholders in compensation for their income stream and taking risk of investment with a company.
Cost of Equity which is based on the constant dividend growth model is mathematically expressed here.
Cost of Equity = [Dn ÷ P] + G
Dn = dividend per share to be paid next year
P = average stock price in the year the latest dividend paid
G = expected growth of dividend on next year
A next year dividend is mathematically expressed like this.
Dn = Dc × (1 + G)
Dc = dividend per share for present year
Cost of Equity = [Dc × (1 + G)] ÷ P + G