Quick Analysis of a company’s financial position.

1 .Three questions which broadly indicate a company’s financial health.

a) Is it consistently making adequate profits.?

(Return on Capital Employed, Return on Net Worth, Profit Margins on sales).

b) Has it borrowed too much?

Debt/Equity Ratio and Debt service ratios)-While calculating borrowings include all loans-
Long Term + Current Portion of Long Term + Short Term. Sometimes short term borrowings
turn out to be chronically long term as in the case of TRF. Are interest costs growing?

c) Does it have adequate cash balances, whether short term or long term?
Cash & Bank Balances + Short term Investments + Long Term Investments which can be
easily liquidated (like JNPT FDs) minus short term borrowings.

If (a) above is healthy (b) and (c) should also be healthy (Good example of healthy is Swaraj
Engines. Not healthy TRF). If despite (a) being healthy ,(b) and (c) are not , check out whether
too much money is locked up in Working Capital-Debtors and Inventory. A good example is
BHEL which despite making good profits , had a perpetual cash crunch. Another, example is L&
T, though not as extreme as BHEL. Here we would need to check Current Ratio, Quick Ratio,
Debtors /Inventory in days. Also check out the Cash Flow from Operations which indicates
blockage of funds in working capital.

Check out Working Capital even if ( a) ,(b) and (c) are healthy. There may be scope for
improvement.

A combination of very low profitability and poor working capital management can wipe out the
company.

2. See the Cash Flow Statement to see from where (Operatons/Investment/Financing) cash is
flowing in and to where it is flowing out.

3. See Director’s Report, Management Discussion & Analysis (MDA) and Audit report for
qualitative information.

4. See past 5 to 10 year trends.