Report Analysis – How to Read the Statements

Learn how to read and understand the basic financial reports used by all businesses. From the balance sheet to the profit and loss statement, understand why the reports are organized in this fashion. Find out how a cash flow statement works and the value it brings to the reader of this report. Finally, understand how the equity section and the reports about ownership are used for a small business.

Return on Equity

Return on Equity

Another performance ratio used in business is return on equity.  It is similar to return on assets except return on equity uses one section of the bottom half of the balance sheet.  This section is technical what the owner’s have rights along with the earnings of the business entity.  Recall that the balance sheet formula...

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Operating Cash Ratio – Formula and Understanding

Operating Cash Ratio - Formula and Understanding

Far and above the most valuable liquidity ratio is the operating cash ratio.  Unlike the other liquidity ratios that are balance sheet derived, the operating cash ratio is more closely connected to activity (income statement based) ratios than the balance sheet.   Its primary element, the numerator in this formula is based on the income statement’s...

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Operating Profit Margin – Formula and Understanding

Operating Profit Margin - Formula and Understanding

Operating profit margin refers to the value earned as a percentage of net sales.   The operating profit is often referred to as earnings before interest, taxes, depreciation and amortization, (EBITDA).   This is a misleading reference as operating profit is actually defined differently by industry sector.   EBITDA is used primarily in valuing businesses.

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Total Assets Turnover Rate – Formula and Analysis

Total Assets Turnover Rate

Within the group of activity ratios, the total assets turnover rate is the broadest in scope.   Similar to other activity ratios, it utilizes net sales as the numerator.  However the denominator doesn't focus in on a single balance sheet asset group like the working capital turnover or fixed assets turnover rates, it includes all assets.

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Debt Ratio

Debt is a natural part of business.   The most volume (number of transactions) of debt occurs with the simple purchase of materials (inventory) or supplies on account.   Every business buys on account whether it is a traditional vendor account like that found in retail or simply using a credit card.   A third party provides credit …

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Fixed Asset Turnover Rate

The fixed asset turnover rate is another activity ratio whereby an income statement financial characteristic is compared to a balance sheet asset section.    In this case, comparing adjusted sales against historical cost of fixed assets.   This financial business ratio is only effective for business operations that are fixed asset intensive.  So with service based industries …

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Working Capital Turnover

The activity ratios measure performance of a current asset on the balance sheet against a corresponding area of the income statement.  The working capital turnover is the most encompassing of all the activity ratios; in effect, it is the most general of the activity ratios.   This particular ratio measures the ability of management to efficiently …

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Cash Ratio

One of the liquidity ratios used in business is the cash ratio.  It is a much more effective tool for small business than the traditional current or quick ratio.  Although the cash ratio is more difficult to manipulate in small business, most entrepreneurs miscalculate the result.  This resource paper is designed to explain to the business entrepreneur …

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Accounts Receivable Turnover Ratio

One of the activity ratios in business is the receivables turnover ratio or rate.   This ratio measures the frequency of collecting the entire balance of accounts receivable during a standard accounting year.   The ideal turns rate is twelve with a higher value indicating an aggressive collection process.   A lower value is a warning about accounts …

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Net Profit

No other business term is so misunderstood, misstated, misleading or deceiving as the words ‘net profit’.   Accounting defines net profit as the amount earned after all associated costs and expenses are subtracted from the associated sales.   The larger or more public the company the more reliable the dollar value as stated on the …

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