Once you know the ratio, compare it for parallels with the other companies in the industries and for the market as a whole. Never forget, stocks with a very high p/e ratio can fall dramatically when even the littlest thing goes sour.
When you see a trend that is restricting a positive cash flow, then you need to have tools at hand to correct the problem, fast. When developing a plan to infuse cash into the business, make sure you line up the sources for the appropriate use. For instance, short term cash problems can be handled with credit cards or a line of credit. Longer cash flow needs might be financed through long term secured loans or a capital loan.
There is no hard fast rule to tell you how much debt a company should have, because the amount can vary based on the industry. If you divide the company’s assets by its equity, you will uncover their financial leverage. The company’s financial leverage is a good tool to see if the company has too much debt. You can compare this number with others in the industry to see where they rank.
If you have 20 times your annual income requirement, it means that with the prescribed withdrawal rate of 5% yearly from your nest egg and the annual expected net return on your investments of 5%, you’ll never run out of money.
When all was said and done I went to a local bank and presented it to the loan officer. She said that she normally did a quick glance and rarely read entire plans, but was so captivated by the opening Executive Summary that she asked me to wait while she finished reading. She immediately agreed to forward it to the sba representative for approval. That was an exciting moment indeed!
Fundamental Analysts believe in the underlying financial strength of a company. The financial strength of a company can be found in its financial statements which contain the Income Statement, the Balance Sheet, and the cash flow examples. This style is also used to value invest – finding companies at bargain prices. It takes a lot of learning, but it is proven. This is the style chosen by the great ones such as Warren Buffet, Peter Lynch, and Ben Graham.
This ratio can let you know how much of the stuff you have in your company is actually owned by someone else — your lender. Having this ratio climb can be a bad sign. It can happen as part of a major expansion, but it can also indicate that you’re getting in over your head.