Oana Labes, MBA, CPA on LinkedIn: The P&L and The Balance Sheet may think they're the popular kids. But the… | 37 comments (2024)

I've been advocating for years that companies focus more on the Cash Flow Statement and not the P&L. After all, you pay your bills with cash. Here's some more thoughts on the Cash Flow Statement and process.

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Very useful information.

#cashflow is Power

Once debt financing is more expensive IT is worth to rethink how you can improve - very nice article.

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**Leverage :-1- Degree of operating leverage ( DOL ) :- It's a financial metric that measures the sensitivity of a company's operating income (EBIT) to changes in its sales. It is used to assess the risk associated with the company's cost structure.The formula for DOL is given by:DOL=ChangeinEBIT / ChangeinSalesDOL =CM / EBIT* If DOL of 2, as example, means that for a 1% change in sales, the company's EBIT will change by 2%. A higher DOL indicates higher risky.********2- Degree of Financial Leverage ( DFL ):-It's a financial metric that measures the sensitivity of a company's earnings per share (EPS) to changes in its earnings before interest and taxes (EBIT). It provides insight into how the company's net income and earnings per share are affected by changes in its operating profit.The formula for DFL is given by:DFL=ChangeinEPS / ChangeinEBITDFL=ChangeinNet income/ ChangeinEBITDFL=ChangeinEBIT / Change EBTA higher DFL means that the company relies more on debt financing, and changes in operating income have a larger impact on net income and EPS. Conversely, a lower DFL indicates lower financial risk.It's essential for investors and analysts to consider both the Degree of Operating Leverage (DOL) and the Degree of Financial Leverage (DFL) when assessing the overall risk associated with a company's cost and capital structure. The combined effect of DOL and DFL is often referred to as the Degree of Total Leverage (DTL).********3-The Financial Leverage Ratio:-Also known as the equity multiplier or leverage factor, measures the extent to which a company uses debt to finance its assets. It helps assess the financial risk associated with a company's capital structureFinancialLeverageRatio using the following formula;=AverageTotalAssets / AverageEquityso the result:1- IF Equal 2, that is mean the Equity = Liabilities2- IF Greater than 2, that is mean the Equity less than Liabilities3- IF Less than 2, that is mean the Equity greater than LiabilitiesIn summary, the Financial Leverage Ratio provides insights into the capital structure of a company and helps stakeholders evaluate the level of risk associated with its use of debt to finance operations and investments.So the capital structure of a company indeed has a significant impact on its financial health and the decision on the appropriate mix of debt and equity is crucial for various reasons like (Financial Health, Risk Management, Cost of Capital, Investor Confidence and Long-Term Strategy)#leverage #financial#operating #CMA_Tips#costmanagement

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রং বেরংয়ের ক্যাশ ফ্লো :1. Operating Cash Flow (OCF): This represents the cash generated or used by a company's core operating activities, such as sales of goods or services. It measures the company's ability to generate cash from its primary business operations.2. Investing Cash Flow (ICF): This reflects cash flows related to the acquisition and disposal of long-term assets, such as property, plant, equipment, and investments in other companies. Positive ICF typically indicates capital investment, while negative ICF may suggest asset sales or divestitures.3. Financing Cash Flow (FCF): FCF tracks cash flows related to a company's capital structure, including changes in debt, equity, and dividend payments. Positive FCF may result from issuing stock or borrowing, while negative FCF can occur due to debt repayment or dividend payments.4. Free Cash Flow (FCF): As mentioned earlier, FCF represents the cash available to a company after covering its operating expenses and capital expenditures. It's a critical measure of a company's financial health and its capacity to invest, repay debt, or distribute dividends to shareholders.5. Net Cash Flow: This is the overall difference between cash inflows and cash outflows during a specified period. It takes into account all cash transactions, including operating, investing, and financing activities.6. Project Cash Flow: In project finance and capital budgeting, cash flows associated with a specific project or investment are analyzed. This includes estimating the initial investment, operating cash flows, and terminal cash flows over the project's life.7. Free Cash Flow to Equity (FCFE): FCFE represents the cash available to a company's equity shareholders after covering all expenses, including debt service. It is often used to assess a company's ability to pay dividends or repurchase shares.8. Free Cash Flow to Firm (FCFF): FCFF measures the cash available to all providers of capital, including equity and debt holders. It is used in valuation models like the discounted cash flow (DCF) analysis to estimate a company's enterprise value.9. Operating Cash Flow to Capital Expenditure (OCF/CAPEX): This ratio compares a company's operating cash flow to its capital expenditures, providing insights into how well a company is generating cash relative to its investment in long-term assets.10. Leverage Cash Flow: This type of cash flow analysis assesses the cash flows associated with a company's debt and interest payments. It helps evaluate a company's ability to meet its debt obligations.These various types of cash flow are essential for different financial analyses and decision-making processes, whether it's assessing a company's financial performance, valuing an investment, or evaluating the feasibility of a project. Each type of cash flow provides unique insights into different aspects of a company's financial situation.

Understanding Financial Leverage 🚀 🚀 🚀 🏹 financial leverage involves borrowing money to fuel growth. This capital can come from banks and lenders .🏹 It is used to amplify 🛩 returns from an investment or project.🏹 Investors use leverage to multiply their buying power in the primary and secondary market.🔱🏹 Companies use leverage to invest in their future growth in order to maximize shareholder wealth .🎲 How to Calculate Financial Leverage ❔ ❔ ❔ There are range of financial leverage ratios to gauge how risky a company's position is, here are few.✔ Total-Debt-to-Total-Assets Ratio🎯 A company can analyze its leverage by seeing what percent of its assets have been purchased using debt. 🎯 A company can subtract thetotal debt-to-total-assets ratioby 1 to find the equity-to-assets ratio. 🎯 If the debt-to-assets ratio is high, a company has relied on leverage to finance its assets.✔ Debt-to-Equity (D/E) Ratio🎯 Thedebt-to-equity (D/E) ratiois used to compare what the company has borrowed compared to what it has raised from private investors or shareholders.🎯 Debt-to-Equity Ratio = Total Debt ÷ Total Equity🎯 A D/E ratio greater than one means a company has more debt than equity. However, this doesn't necessarily mean a company is highly leveraged. Each company and industry typically operates in a specific way that may warrant a higher or lower ratio.✔ Debt-to-EBITDA Ratio ⛽ 🎯 A company can compare its debt to how much income it makes in a given period.🎯 Company with a highdebt-to-EBITDAis carrying a high degree of weight compared to what the company makes. The higher the debt-to-EBITDA, the more leverage ⚓ a company is carrying.🎯 Debt-to-EBITDA = Total Debt ÷ Earnings Before Interest, Taxes, Depreciation, and Amortization. ⛳ ⛳ Financial ratios hold the most value and give good insights when compared over time or against competitors. 💡 Parth Verma🔶 🔶 🔶 🔶 🔶 🔶 🔶 🔶🔶 🔶 🔶🔶 🔶 🔶🔶 🔶🔶 🔶✅ Share your thoughts and insights below 💬 💭✅ Repost if you found it insightful💡✅ Follow me Govind Nandwana for more such value amazing content 🔔#finance #equityresearch #investmentbanking #investing

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Q.2 (cont)a.Balance SheetThe Balance Sheet, also known as the statement of financial position, is an important financial statement because it shows the status of a business over a given period. It shows the assets owned, the liabilities owed, and the capital of the company. One important way we can use the balance sheet to assess a company’s performance is by computing financial ratios. 1.Analyze the company’s liquidity of the company using liquidity ratios and recommend effective working capital management policies that can improve the working management of the company.2.Assess the solvency of the company by computing Debt-to-Equity, and Debt-to-Assets ratios. The result will help us determine the debt structuring policy direction of the company or recommend debt refinancing options for the business to reduce interest expense and exposure to loan capital.3.Return on Assets ratio can be computed to assess whether the company is under-utilizing its assets to generate revenue by comparing the result with competitor or industry benchmarks. The analysis may recommend projects that are in line with the company’s long-term goal to improve revenues.4.The return on asset ratio can also help us to identify opportunities for cost savings to improve the ratio.b.Cash flow statement.A cash flow statement provides information about how cash is generated and used over a given period. It is divided into operating, financing, and investing activities.Assessment of cash flows from operating activities can provide us with insights into how the business generates cash from its core business operations. A positive operating cash flow is a positive sign of a company’s financial health. An evaluation of a company’s investing activities is to determine whether the business is making strategic investments for future growth through acquisitions and scrapping of assets.Under the financing activities, we would examine debt issuance, repayments, and costs associated with them. A consistent reduction in book debt and interest expense may indicate financial soundness. Dividend payments to shareholders and share buy-backs may portray a positive outlook as well.Free cash flow (i.e. Operating cash flow minus Capital expenditure) can provide us with information about the availability of excess cash for future investments, dividends, or debt reduction.

Financial ratio 1. Return on Assets (ROA) = Net Income / Total AssetsROA measures how efficiently a company is using its assets to generate profits. A higher ROA indicates that a company is generating more profits per dollar of assets.2. Current Ratio = Current Assets / Current LiabilitiesThe current ratio measures a company's ability to pay off its short-term debts with its current assets. A higher current ratio indicates that a company has more liquid assets to pay off its debts.3. Debt-to-Equity Ratio = Total Debt / Total EquityThe debt-to-equity ratio measures a company's financial leverage and its ability to pay off its long-term debts. A higher debt-to-equity ratio indicates that a company has more debt relative to its equity.4. Gross Profit Margin = Gross Profit / RevenueThe gross profit margin measures how much profit a company is making on its sales after deducting the cost of goods sold. A higher gross profit margin indicates that a company is generating more profit per dollar of revenue.5. Return on Sales (ROS) = Net Income / RevenueROS measures how efficiently a company is generating profits from its revenue. A higher ROS indicates that a company is generating more profits per dollar of revenue.6. Quick Ratio = (Current Assets - Inventory) / Current LiabilitiesThe quick ratio measures a company's ability to pay off its short-term debts with its most liquid assets (excluding inventory). A higher quick ratio indicates that a company has more liquid assets to pay off its debts.7. Debt-to-Assets Ratio = Total Debt / Total AssetsThe debt-to-assets ratio measures the percentage of a company's assets that are financed by debt. A higher debt-to-assets ratio indicates that a company has more debt relative to its assets.8. Net Profit Margin = Net Income / RevenueThe net profit margin measures how much profit a company is making on its sales after deducting all expenses. A higher net profit margin indicates that a company is generating more profit per dollar of revenue.9. Asset Turnover Ratio = Revenue / Total AssetsThe asset turnover ratio measures how efficiently a company is using its assets to generate revenue. A higher asset turnover ratio indicates that a company is generating more revenue per dollar of assets.10. Debt-to-Capital Ratio = Total Debt / (Total Debt + Total Equity)The debt-to-capital ratio measures the percentage of a company's capital that is financed by debt. A higher

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