Purchasing and Financing 2024

For example, companies in cyclical industries may require higher ratios to remain solvent
during downturns.
3. Working Capital = Current Assets - Current Liabilities
The Accounting Equation can be rearranged to determine the net worth of the business,
or the amount of assets that belong to the owner debt-free. Similarly, the Working Capital
takes the difference between current assets and current liabilities to measure the
immediate liquidity of the business.
It is mainly used to check current assets that can be converted to cash against current
debts that may be coming due. It provides a comfort level of available resources to pay
current liabilities. A negative result indicates a company may have trouble paying debts
and may be at risk of bankruptcy.
It is more relevant when compared with previous quarters or years. Declining figures may
indicate a decline in sales, and thus a decline in Cash or Accounts Receivable. However, an
increase in the number may indicate operating inefficiency. Increasing Cash Balances may
indicate the company has not utilized cash effectively for growth.
Long Term Financial Condition and Liquidity
1. Book Value
Book Value is one of the simplest and one of the most important measurements of a
company's financial condition. It equals Owner's Equity, or the company's assets minus its
liabilities as listed on the Balance Sheet.
Assets - Liabilities = Owner's Equity
Net Income increases the value of the business, or Owner's Equity, by increasing Retained
Earnings. Although investors often buy and sell on short-term information, it is ultimately
the growing value of the company that determines the successes and failures of
management and the real return on investment.
In publicly traded companies, Book Value is measured as:
Shareholders Equity/Shares of Stock Outstanding
Book Value is what the company is worth if it were liquidated today. For publicly traded
companies, it is compared to the company's Market Capitalization, or market value of all
the company's stock outstanding.
When the share price of a company's stock is low in comparison to the Book Value per
Share, the stock is considered a bargain. Conversely, if the share price is high in relation to
the company Book Value, the stock is considered expensive and possibly overpriced.
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