When studying a company's current financial situation, we should combine current assets and current liabilities to analyze it. The current financial situation contains two important meanings:
A the balance of current assets exceeding current liabilities is called "net current assets" and "working capital"
B Ratio of current assets to current liabilities-called "current ratio"-quick ratio-current assets-current liabilities-inventory-prepayments
Working capital is determined by subtracting current liabilities from current assets. Working capital is an extremely important factor to judge the financial strength of industrial enterprises.
Confirming the value of working capital can not only measure the normal operation of the company, but also expand business space without new financing, and can also easily cope with emergencies and large losses without going bankrupt.
A company's lack of working capital will at least lead to slow financial payment, thus reducing its subsequent credit rating. It will also lead to a sharp drop in business volume, rejection of suitable business, and inability to turn losses into profits and further expand business. The more serious consequence is that it is unable to repay its debts and is in a state of bankruptcy.
How much working capital a company needs depends on its size and business characteristics. The main reference index is the amount of working capital required for sales per sales unit. For example, a retail store that mainly deals in cash and has a fast inventory turnover needs much less working capital than those that make cars.
Working capital per share is an interesting figure in stock investment, so we should pay attention to the fluctuation of working capital every year.
The current ratio (the ratio of current assets divided by current liabilities) is generally greater than 2, which is a minimum standard. Quick ratio {current assets-current liabilities-inventory-prepayment} should be greater than 1.
Monetary funds in the balance sheet
Money funds only need to pay attention to the consolidated balance sheet data. Subtract the beginning data from the ending data, and it is the money fund added in one year. Pay attention to restricting the use of monetary funds.
1, for companies, there are usually three ways to generate monetary funds. A sells stocks or borrows money, B sells assets or business unit C conducts business activities, and the cash inflow is continuously greater than the cash outflow. Companies that meet the third situation are usually companies with some sustainable competitive advantage.
Too little monetary funds may mean that the company's solvency is insufficient and it is stretched in the company's operation. Excessive monetary funds indicate that the ability to use funds is weak or the nature of funds is problematic.
Investors should pay close attention to the following four situations:
Monetary fund balance 1 is far less than short-term liabilities.
Money is abundant, but I borrowed a lot of debts with interest or even high interest rates.
There are many time deposits and many funds in other currencies, but the liquidity is seriously insufficient.
The amount of funds in other currencies is huge, but there is no reasonable explanation.
Summary: In the above state, case 1 may represent the company's short-term debt repayment crisis, while case 2-3-4 means that seemingly abundant monetary funds may be fictitious, frozen, or occupied by major shareholders for a long time, and then returned to the company's account a few days before the reporting date, and then disappeared. These are all important criteria for screening companies.
Seeing this, I believe you already know how to analyze the company's current financial situation.