What Are Business Financials?

Corporate finance refers to the value movement of an enterprise in the production process, and it often manifests itself as a series of activities such as the acquisition, use, consumption, and distribution of corporate funds. Its essence is the economic relationship between the enterprise and various aspects reflected in the capital movement in the production process. This relationship is expressed as follows: (1) The financial relationship between the enterprise and the state includes: the payment between the enterprise and the state finance , Funding relationship. The fund transfer relationship between the enterprise and the competent authority. The deposit and loan relationship between the enterprise and the state bank. (2) The financial relationship between an enterprise and other units refers to the settlement relationship of monetary funds between enterprises and enterprises, and between enterprises and other non-enterprise units that provide products or services to each other. Its essence reflects the equivalent relationship of commodities between units. (3) The financial relationship between various departments within an enterprise refers to the accounting relationship between capital occupation and consumption between the factory department and various management departments, as well as the supply, production and sales of the enterprise. It embodies the division of labor and cooperation between the various departments and units of the enterprise under the leadership of the factory. It is also a reflection of corporate responsibilities, rights, and benefits in all aspects. (4) The financial relationship between the enterprise and employees. Enterprises use their own sales income to pay their employees wages, bonuses, and allowances in accordance with the socialist principle of distributing as much as possible, forming a fund settlement relationship between the enterprise and employees, which is essentially a distribution relationship. ^[1]

Enterprise finance

Liquidity ratio

Liquidation ability is the ability of an enterprise to generate cash. It depends on how much liquid assets can be turned into cash in the near future.

Current ratio

formula:

Asset management ratio

Inventory turnover

Formula: Inventory turnover rate = product cost of sales / [(beginning inventory + ending inventory) / 2]

Corporate financial culture-financial risk

Standard value set by the enterprise: 3

Significance: The inventory turnover rate is the main indicator of inventory turnover speed. Increasing the inventory turnover rate and shortening the business cycle can increase the company's ability to realize cash.

Analysis tips: The inventory turnover speed reflects the level of inventory management. The higher the inventory turnover rate, the lower the inventory occupancy level, the stronger the liquidity, and the faster the inventory is converted into cash or receivables. It not only affects the short-term debt repayment ability of an enterprise, but also an important content of the entire enterprise management.

Inventory turnover days

Formula: Inventory turnover days = 360 / Inventory turnover rate = [360 * (beginning inventory + ending inventory) / 2] / product cost of sales

Standard value set by the enterprise: 120

Significance: The number of days an enterprise needs to purchase inventory, put it into production, and sell it. Increasing the inventory turnover rate and shortening the business cycle can increase the company's ability to realize cash.

Analysis Tips: The inventory turnover speed reflects the inventory management level. The faster the inventory turnover speed, the lower the inventory occupancy level, the stronger the liquidity, and the faster the inventory is converted into cash or receivables. It not only affects the short-term debt repayment ability of an enterprise, but also an important content of the entire enterprise management.

Accounts receivable turnover

Definition: The average number of receivables converted into cash during the specified analysis period.

Formula: Turnover rate of accounts receivable = sales income / [(beginning accounts receivable + ending accounts receivable) / 2]

Standard value set by the enterprise: 3

Significance: The higher the receivables turnover rate, the faster the recovery. On the contrary, it means that the working capital is too sluggish on the accounts receivable, which affects the normal fund turnover and debt repayment ability.

Analysis prompts: The account receivable turnover rate should be considered in combination with the operation mode of the enterprise. The following situations can not reflect the actual situation using this indicator:

First, companies operating seasonally;

Second, a large number of installment payment methods are used;

Third, sales that make heavy use of cash settlement;

Fourth, a large number of sales at the end of the year or a significant decline in sales at the end of the year.

Accounts receivable turnover days

Definition: Represents the time required for an enterprise to obtain the right to receivables, recover the amounts, and convert them into cash.

Formula: Accounts receivable turnover days = 360 / Accounts receivable turnover rate

= (Beginning of accounts receivable + closing accounts receivable) / 2] / product sales revenue

Standard value set by the enterprise: 100

First, companies operating seasonally;

Second, a large number of installment payment methods are used;

Third, sales that make heavy use of cash settlement;

Fourth, a large number of sales at the end of the year or a significant decline in sales at the end of the year.

Business cycle

Formula: Business cycle = inventory turnover days + accounts receivable turnover days

= {[(Beginning inventory + ending inventory) / 2] * 360} / cost of product sales + {[((beginning of accounts receivable + ending accounts receivable) / 2] * 360} / product sales

Standard value set by the enterprise: 200

Significance: The operating cycle is the time from when inventory is acquired to when inventory is sold and cash is recovered. In general, a short operating cycle indicates a fast turnover of funds; a long operating cycle indicates a slow turnover of funds.

Analysis tips: The business cycle should generally be analyzed in combination with the inventory turnover and the accounts receivable turnover. The length of the business cycle not only reflects the asset management level of the enterprise, but also affects the company's ability to pay its debts and profitability.

Turnover ratio of current assets

Formula: turnover ratio of current assets = sales income / [(current assets at the beginning of the period + current assets at the end of the period) / 2]

Standard value set by the enterprise: 1

Significance: The turnover rate of current assets reflects the turnover rate of current assets. The faster the turnover rate, the relative savings in current assets will be. Waste of assets reduces business profitability.

Analysis tips: The turnover rate of current assets should be analyzed in combination with inventory and accounts receivable, and used in combination with indicators reflecting profitability, which can comprehensively evaluate the profitability of enterprises.

Business financial flowchart

Total asset turnover

Formula: Turnover rate of total assets = sales revenue / [(total assets at the beginning of the period + total assets at the end of the period) / 2]

Standard value set by the enterprise: 0.8

Significance: This indicator reflects the turnover rate of total assets. The faster the turnover, the stronger the sales ability. Enterprises can use the method of small profits but quick turnover to accelerate asset turnover and bring about an absolute increase in profits.

Analysis Tips: The total asset turnover index is used to measure the ability of an enterprise to use assets to make profits. It is often used together with indicators that reflect profitability to comprehensively evaluate the profitability of an enterprise.

Debt ratio

The debt ratio is a ratio that reflects the relationship between debt and assets and net assets. It reflects a company's ability to pay its long-term debt as it matures.

Gearing ratio

Formula: Asset-liability ratio = (Total Liabilities / Total Assets) * 100%

Standard value set by the enterprise: 0.7

Significance: Reflects the ratio of capital provided by creditors to total capital. This indicator is also called the debt-running ratio.

The analysis hints that the larger the debt ratio, the greater the financial risks facing the company, and the stronger its ability to obtain profits. If an enterprise has insufficient funds and relies on debt maintenance, which results in a particularly high asset-liability ratio, the debt service risk should be paid special attention. The asset-liability ratio is between 60% and 70%, which is reasonable and stable. When it reaches 85% or above, it should be regarded as a warning signal, and the enterprise should pay sufficient attention.

Equity ratio

Formula: Equity Ratio = (Total Liabilities / Shareholders' Equity) * 100%

Standard value set by the enterprise: 1.2

Significance: Reflects the relative proportion of capital provided by creditors and shareholders. It reflects whether the capital structure of an enterprise is reasonable and stable. At the same time, it shows that the creditor's investment of capital is protected by the shareholders' rights.

Analysis hint: Generally speaking, a high equity ratio is a high-risk, high-return financial structure, and a low equity ratio is a low-risk, low-return financial structure. From the perspective of shareholders, in the period of inflation, companies borrowing can transfer losses and risks to creditors; in times of economic prosperity, borrowing can obtain additional profits; in times of economic contraction, borrowing less can reduce the interest burden and financial risks.

Tangible net worth debt ratio

Formula: Tangible Net Worth Debt Ratio = [Total Liabilities / (Shareholder Equity-Net Intangible Assets)] * 100%

Standard value set by the enterprise: 1.5

Significance: The extension of the property right ratio indicator is more cautiously and conservatively reflected in the degree to which the creditors 'capital invested in the liquidation of the enterprise is protected by the shareholders' equity. Regardless of the value of intangible assets including goodwill, trademarks, patent rights, and non-patented technologies, they may not be used to pay off debts. For prudence, they are all considered insolvent.

Analysis hints: From the perspective of long-term debt repayment ability, a lower ratio indicates that the company has good debt repayment ability and the scale of borrowing is normal.

Earned interest multiples

Formula: earned interest multiple = profit before interest / tax / interest expense

= (Total Profit + Financial Expenses) / (Interest Expenses in Financial Expenses + Capitalized Interest)

An approximate formula is also usually available: multiples of interest earned = (total profit + financial expenses) / financial expenses

Standard value set by the enterprise: 2.5

Significance: The ratio of a company's operating income to its interest expense is a measure of the company's ability to repay interest on borrowings. It is also called the interest protection multiple. As long as the interest multiples obtained are large enough, the enterprise has sufficient ability to pay interest.

Analysis hints: Enterprises need to have a large enough EBIT before they can afford the capitalized interest. The higher the indicator, the less pressure on the debt interest of the enterprise.

Profitability ratio

Profitability is the ability of a company to make a profit. Both investors and debtors are very concerned about this project. In the analysis of profitability, factors such as abnormal transactions such as securities trading, business projects that have been or will be stopped, special projects such as major accidents or legal changes, and cumulative effects of changes in accounting policies and financial systems should be excluded. ^[2]

Sales margin

Formula: Net sales margin = Net profit / Sales revenue * 100%

Standard value set by the enterprise: 0.1

Significance: This indicator reflects the net profit brought by each yuan of sales revenue. Represents the level of income from sales revenue.

Analysis tips: While increasing sales revenue, companies must obtain more net profit accordingly in order to keep the net sales margin unchanged or increase. Net sales margin can be decomposed into indicators such as gross sales margin, sales tax rate, cost of sales rate, and expense ratio during the sales period for analysis.

Gross profit margin

Formula: Gross profit margin of sales = [(sales revenue-cost of sales) / sales revenue] * 100%

Standard value set by the enterprise: 0.15

Significance: It means how much money each dollar of sales income deducts from the cost of sales can be used for expenses and profitability in each period.

Analysis hints: The gross profit margin of sales is the initial basis for the net profit margin of sales. Without a large enough gross profit margin, sales cannot be profitable. An enterprise can analyze the gross profit margin of sales on a regular basis, so as to make judgments on the occurrence of the company's sales revenue, cost of sales and ratio.

Net asset interest rate

= (Return on Total Assets)

Formula: Net asset interest rate = Net profit / [(total assets at the beginning of the period + total assets at the end of the period) / 2] * 100%

Standard value set by the enterprise: according to the actual situation

Significance: Comparing the company's net profit over a certain period of time with the company's assets, indicating the comprehensive utilization of corporate assets. The higher the index, the higher the efficiency of asset utilization, indicating that the company has achieved good results in terms of increasing income and saving funds, otherwise the opposite is true.

Analysis hints: The net asset interest rate is a comprehensive indicator. The amount of net profit is closely related to the amount of assets, the structure of assets, and the level of management. The reasons that affect the level of the net asset interest rate are: the price of the product, the level of the unit product cost, the amount of product output and sales, and the size of the capital occupation. It can be combined with DuPont's financial analysis system to analyze the problems in operation.

Roe

= (Return on Equity)

Formula: Return on net assets = Net profit / [(total owner's equity at the beginning of the period + total owner's equity at the end of the period) / 2] * 100%

Standard value set by the enterprise: 0.08

Significance: The return on net assets reflects the return on investment of the company's owner's equity, also known as the return on equity or return on equity, and is highly comprehensive. Is the most important financial ratio.

Analysis hint: DuPont analysis system can decompose this indicator into multiple related factors, and further analyze all aspects that affect the return of owner's equity. Such as asset turnover, sales margin, equity multiplier. In addition, when using this indicator, it should also analyze "Receivables", "Other Receivables", and "Amortized Expenses".

Cash flow analysis

The main functions of the cash flow statement are:

First, provide the actual situation of the company's cash flow;

Secondly, it helps to evaluate the quality of the current income,

Third, it helps to evaluate the financial resilience of the company.

Fourth, it helps to evaluate the liquidity of enterprises;

Fifth, it is used to predict the future cash flow of the company.

Liquidity analysis

Liquidity analysis is the ability to quickly transform assets into cash.

Cash due debt ratio

Formula: cash due debt ratio = net cash flow from operating activities / debt due during the period

Corporate financial culture_map of corporate financial culture

Debts due in this period = long-term liabilities due within one year + notes payable

Standard value set by the enterprise: 1.5

Significance: Comparing the net cash flow from operating activities with the debts due this period, it can reflect the ability of an enterprise to repay due debts.

Analysis hints: In addition to borrowing new debt to pay off old debts that companies can use to repay debts, cash inflows from operating activities should generally be used to pay off debts.

Cash flow debt ratio

Formula: cash flow debt ratio = annual cash flow from operating activities / current liabilities at the end of the period

Standard value set by the enterprise: 0.5

Significance: It reflects the degree of protection of cash generated by operating activities against current liabilities.

Analysis hints: In addition to borrowing new debt to pay off old debts that companies can use to repay debts, cash inflows from operating activities should generally be used to pay off debts.

Total cash debt ratio

Formula: Cash Flow Liability Ratio = Net Cash Flow from Operating Activities / Total Ending Liabilities

Standard value set by the enterprise: 0.25

Significance: Except for borrowing new debt to repay old debt, which can be used by the enterprise to repay debts, it should generally be cash inflows from operating activities to repay debts.

Analysis hint: The calculation results must be compared with the past, and the high and low can be determined by comparing with the same industry. The higher this ratio, the stronger the company's ability to assume debt. This ratio also reflects the company's maximum ability to pay interest.

Ability to get cash

Sales cash ratio

Formula: Cash to Sales Ratio = Net Cash Flow from Operating Activities / Sales

Standard value set by the enterprise: 0.2

Significance: Reflects the net cash inflow per yuan of sales, the larger the value, the better.

Analysis prompts: The calculation result must be compared with the past, and compared with the industry to determine the high and low. The higher this ratio, the better the income quality of the enterprise and the better the effect of capital utilization.

Operating cash flow per share

Formula: Operating cash flow per share = Net cash flow from operating activities / Number of ordinary shares

The number of ordinary shares is listed by the enterprise based on the actual number of shares.

Standard value set by the enterprise: according to the actual situation

Significance: It reflects the net cash obtained from each share operation. The larger the value, the better.

Analysis hint: This indicator reflects the company's maximum ability to distribute cash dividends. Beyond this limit, it is necessary to borrow dividends.

Cash recovery rate of all assets

Formula: cash recovery rate of all assets = net cash flow from operating activities / total assets at the end of the period

Standard value set by the enterprise: 0.06

Significance: Explain the ability of an enterprise's assets to generate cash. The larger the value, the better.

Analysis Tips: If you calculate the inverse of the above indicators, you can analyze that all assets are recovered with cash from operating activities and the period required. Therefore, this indicator reflects the meaning of corporate asset recovery. The shorter the payback period, the stronger the assets' realizing ability.

Financial resilience analysis

Cash meets investment ratio

Formula: Cash satisfies investment ratio = Net cash flow from accumulated operating activities in the past five years / Capital expenditure, inventory increase, and cash dividends over the same period.

Standard value set by the enterprise: 0.8

Access method: The cumulative net cash flow from operating activities in the past five years shall refer to the sum of the net cash flow from operating activities in the previous five years; the sum of capital expenditures, inventory increase, and cash dividends during the same period shall also be taken from the relevant columns of the cash flow statement. Take the average of the past five years;

Capital expenditures from cash items paid for the purchase and construction of fixed assets, intangible assets and other long-term assets;

Inventories increase and are taken from the attached table of the cash flow statement. The inverse of the decrease column of the inventory is the increase of inventory; the cash dividends are taken from the main table of the cash flow statement, and the cash items paid for the distribution of profits or dividends. If the new enterprise accounting system is implemented, the item is the cash paid for the distribution of dividends, profits or interest payments, then the method of access is: the cash paid for the distribution of dividends, profits or interest payments on the main table minus the financial expenses in the schedule .

Significance: Explain that the cash generated by the business meets the ability to meet capital expenditures, increase inventory and pay cash dividends. The larger the value, the better. The larger the ratio, the higher the self-sufficiency rate of funds.

Analysis Tips: If it reaches 1, it means that the company can use the cash obtained from operations to meet the funds needed for the expansion of the company; if it is less than 1, it means that part of the company's funds must be supplemented by external financing.

Cash dividend protection multiples

Formula: Cash dividend protection multiple = operating cash flow per share / cash dividend per share

= Net cash flow from operating activities / Cash dividends

Standard value set by the enterprise: 2

Significance: The larger the ratio, the stronger the ability to pay cash dividends, and the larger the value, the better.

Analysis Tips: The analysis results can be compared with peers and with the past.

Operating index

Formula: Operating Index = Net Cash Flow from Operating Activities / Cash Due to Operations

Of which: Cash from operations = Net income from operating activities + Non-cash expenses

= Net profit-Investment income-Non-operating income + Non-operating expenses + Depreciation withdrawn during the period + Amortization of intangible assets + Amortization of expenses to be amortized + Amortization of deferred assets

Standard value set by the enterprise: 0.9

Significance: Analyze the proportional relationship between accounting income and net cash flow, and evaluate the quality of income.

Analysis tips: Close to 1, indicating that the cash that the company can use to operate is equivalent to the cash it should receive, and the quality of the income is high; if it is less than 1, it indicates that the quality of the company's income is not good enough.

U.S. Corporate Finance Organization

The titles are: Chief Financial Officer, Financial Director, Financial Controller, Financial Manager, Financial Supervisor

Some are in charge of a wide range of fields, such as finance, accounting, and even information systems. They are only responsible for the two functions of finance and accounting. The title of the post is not absolutely important. The key is whether the post, especially the position of the company's senior administrative officer, is necessary.

What Are Business Financials?

Enterprise finance

IN OTHER LANGUAGES

RELATED ARTICLES

How can we help?