Are Your Assets Working for You? The Return on Assets Ratio

Are Your Assets Working for You? The Return on Assets Ratio

Be Sociable, Share! Tweet This Return On assets post is the fifth post in a series of articles about financial ratios. Which Company is Worth More? Let us assume you are interested in purchasing a company that makes bicycles here in the USA. You have narrowed your search to two companies. Remarkably, net profits from both companies are almost identical, varying by only $2,500. Company One has net profits of $235,000 and Company Two has profits of $237,500. Each company is asking $1,000,000 in an asset only sale. You are confused, which should you buy? The Return On Assets Ratio One way of sorting the wheat from the chaff in this example is to look at Return On Assets. Return on Assets determines how efficiently a company is using its assets to produce profits. Often, asset heavy companies such as an airline, produce low profits on large amounts of assets. Their capital intensive nature demands large investment in assets before any profits are seen. Less capital intensive companies, such as a bagel shop, may produce large profits on a small amount of assets. So Let’s Examine the Targets In the case above, let’s assume average assets for 2013 (beginning year total assets + ending year total assets from the balance sheet divided by 2) for Company One is $560,000 and Company Two is $730,000. Return On Assets for Company One is 0.42. Return On Assets for Company Two is 0.33. Company One had a slightly lower net profit but more efficiently used its assets to manufacture those profits. All other factors being equal, and they never are, Company One should be able to expand its...
The Current Ratio – What Does Your Financial Statement Actually Say??

The Current Ratio – What Does Your Financial Statement Actually Say??

Be Sociable, Share! TweetIn this series we will look at the various financial ratios used by bankers, buyers, and investors to evaluate the fiscal health of your company. While there are a great many ratios in common use, we are going to examine the most important and commonly used in financial analysis. The Current Ratio The current ratio is the ratio of current assets to current liabilities on your balance sheet. This is a critical ratio because it demonstrates whether the company is likely to be able to weather short term adversity without significant hardship. The current assets are all assets held by the company that can be converted to cash within one year. Typically this included cash, investments, inventory, and current accounts receivables. Even though some other assets may be sold or liquidated within a year, such as a building, there is no guarantee that liquidation would always happen within 12 months. Those assets are not counted as current assets. Current liabilities are those items that the company has to pay within one year. They are normally accounts payable and current portion of long term debt. It is expected that any fiscally healthy company will have enough current assets, that when converted to cash, are sufficient to pay off all the current liabilities in full. Therefore a company that has current assets of $500,000 and current liabilities of $500,000 would have a current ratio of 1, or 1/1. If, in this example, the current liabilities were $250,000 instead of $500,000, the current ratio would be 500,000/250,000 = 2, or 2/1.   Large, well established companies often have very high current...
M&A Talk: The Why and When of Selling Your Company

M&A Talk: The Why and When of Selling Your Company

Be Sociable, Share! TweetThis is the first post of a series on Mergers & Acquisitions (M&A).  I’ve experienced both the buyer side and the seller side of this process and plan to share some of my insights on buying and selling companies, and the M&A process. I know way too much about PowerPoint. I no longer had “hat head”. I had “headset head”. With the number of times I spoke to potential suitors, I got to know the lady from the Skype “Call Testing Service” better than my wife. For close to a year, my life was about creating and adjusting presentations while spending inordinate amounts of time on the phone with scores of technology firms, private equity groups and venture capitalists. As a result of my experiences, I learned a thing or two about exit strategies and what makes M&A people tick. My organization was in the midst of switching markets. We had traditionally relied on revenue and profit generation from the state and local government markets, but due to budget crunches within government we needed to diversify. After significant research of various markets, including energy, financial and healthcare, we decided to focus our efforts on electronic health records. We needed capital to support this transition, and I made the decision that the best source of this capital was to either take in venture or private equity funding, or to sell the business outright. After successfully selling my company to a private equity firm, I also had the opportunity to be on the other side of the table – performing opportunity analysis and helping organizations understand whether it...
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