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I heard today while listening to an accounting podcast that a balance sheet (or maybe it was a cash-flow document) can be used to determine if a company has enough money to pay its employees. Since these types of reports are frequently publicized, I thought it might help in investing, or even looking for a job. Can someone provide me a pair of examples (one good, one bad), and walk me though how to understand such a document?

Brythan
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leeand00
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1 Answers1

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I heard today while listening to an accounting podcast that a balance sheet... can be used to determine if a company has enough money to pay its employees.

The "money" that you're looking at is specifically cash on the balance sheet. The cash flows document mentioned is just a more-finance-related document that explains how we ended at cash on the balance sheet.

...even looking for a job

This is critical, that i don't believe many people look at when searching for a job. Using the ratios listed below can (and many others), one can determine if the business they are applying for will be around in the next five years. 

  Quick ratio: [(Cash + Marketable Securities + Accounts Receivable) / Current Liabilities]
  Current ratio: [Current Assets/ Current Liabilities]
  Debt to equity ratio: [Total Liabilities/ Total Owner's Equity]


Can someone provide me a pair of examples (one good)?

My favorite example of a high cash company is Nintendo. Rolling at 570 Billion USD IN CASH ALONE is astonishing. Using the ratios we can see how well they are doing. 

  Quick ratio: [(570B + 339B + 39B) / 98B] = 9.673
      In immediate assets only they can pay their debts 9 times over.
  Current ratio: [1.02T/ 98B]              = 10.408
      They can pay their debts 10 times over. 
  Debt to equity ratio: [136B/ 1.16TT]       = 0.119
      12% of their assets are financed by debt.

Can someone provide me a pair of examples (one bad)?

Tesla is a good example of the later on being cash poor. 

  Quick ratio: [(3.5B + 0 + .499B) / 5.83B]   = .686
      In immediate assets only, Tesla can 70% of their debts.
  Current ratio: [6.26B/ 5.83B]               = 1.074
      They can pay their debts 1.074 times over (If all assets are sold). 
  Debt to equity ratio: [16.75B/ 5.91B]       = 2.834
      Most of their assets are financed by debt.


Walk me though how to understand such a document?

*Note: This question is highly complex and will take months of reading to fully comprehend the components that make up the financial statements. I would recommend that this question be posted completely separate.

Liam
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