Reading Financial Reports For Dummies, 3rd Edition

Chapter 12

Looking at Liquidity

IN THIS CHAPTER

Calculating various debt and income ratios

Looking at debt in relation to equity and capital

Making money is great, but if a business ties up too much of its money in nonliquid assets (such as factories it can't easily sell) or carries too much debt, it isn't going to be around long to make more money. A company absolutely must have the cash it needs to carry out day-to-day operations and pay its debt obligations if its owners want to stay in business.

Lenders who have money wrapped up in a company follow debt levels closely. They definitely want to be sure they're going to get their money back, plus interest. As an investor, you need to take a close look at a company's debt, too, because your investment can get wiped out if the company goes bankrupt. So if you're investing in a company, you want to be certain that the company is liquid and isn't on the road to debt troubles.

So how do you make sure that the firm you invest in isn't about to spiral down the toilet, taking all your money with it? Well, you need to check out the company's ability to pay its bills and pay back its creditors. But looking at one company doesn't give you much information. Instead, compare the company with similar companies, as well as with the industry ...