How to Find the Financial Health of a Business

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When you are thinking about investing in a company, it helps to know the financial health of a business. The data needed is freely available on the Internet, and the calculations are simple division and multiplication formulas. With these calculations you will be able to determine of a business is solvent and suitable or close to bankruptcy and safely judge whether or not a company would be a suitable place for your investment funds. A calculator may not even be required.

Acquire the company's financial data. This only works for publicly traded companies as private companies are under no obligation to publish their financial figures. You can go to the individual company's website where they usually publish their yearly report; if not you can request a copy by contacting the company's investor relations officer. The better option is to go to Yahoo Finance or Bloomberg to get the data where it is easier to access and you can find any publicly traded company's figures.

Calculate the leverage ratio of the company by dividing the debt (amount company owes on loans) by the assets (stuff company owns and is owed by others) of the company. The higher the ratio, the more likely the company is overextended. A larger, more well established company can have large ratios of debt to equity and still be stable but you should examine future business plans to see if the business is using the debt properly.

Calculate the operating ratio of the company. This is the net profit (the money the company makes after paying for expenses) divided by the gross profit (the money made by the company before paying for expenses). The higher the ratio, the more efficient the company.

Compare these ratios to other companies in the same sector or industry. For example, compare Ford's financial ratios to Toyota's and GM's financial ratios. If the company is below industry benchmarks, it may indicate that it is a laggard and may not be worth investment. However, if it is above competitors that can indicate that it is the industry leader and is a safe investment.

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About the Author

Harvey Birdman has been writing since 2000 for academic assignments. He has trained in the use of LexisNexus, Westlaw and Psychnotes. He holds a Juris Doctor and a Master of Business Administration from the Chicago Kent School of Law and a Bachelor of Arts in both political science and psychology from the University of Missouri at Columbia.

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