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Business Finance Metrics

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Submitted By catruesdell
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There are several financial metrics and ratios that are available from the balance sheet and the statement of cash flows that can indicate the financial health of a company. I will be taking a look at some of these metrics and ratios. I will look at where they come from and how they are used by business managers, investors, and government regulators. These can be very helpful to the informed investor to ensure a wise investment.
The first financial metric that we will look at is liquidity. “Liquidity describes ‘the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid.’” (Donald E Kieso PhD, Jerry J. Weygandt PhD, & Terry D. Warfield, 2012) Liquidity provides information such as the ratio of cash or near cash to the short-term liabilities. Liquidity is important in that it can indicate whether a company will have the resources necessary to pay its current and maturing obligations. Generally speaking, the better liquidity a company has the less risk of failure it faces. Closely related to liquidity is solvency. “Solvency refers to the ability of a company to pay its debts as they mature.” (Donald E Kieso PhD, Jerry J. Weygandt PhD, & Terry D. Warfield, 2012) The lower the debt a company carries the higher the solvency as the company will not need much of its assets to pay its debts. Liquidity and solvency affect the company’s financial flexibility. Financial flexibility “measures the ‘ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities.’” (Donald E Kieso PhD, Jerry J. Weygandt PhD, & Terry D. Warfield, 2012) Liquidity ratios include the current ratio and the quick ratio. “The current ratio is a financial ratio that shows the proportion of current assets to current

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