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Basic Finance Essay

877 words - 4 pages

Basic Finance

The main purpose of studying finance is to gain an understanding of the financial performance of a company, corporation or industry. By looking at a company's financial performance, decisions can be made about many things by many different players. Corporations are rated by different agencies that examine financial records and potential for growth. Fitch ratings are a good example of this. My employer has an A++ Fitch rating. This high rating allows a non-profit company to borrow money at lower interest rates. In a publicly held company, which is one that has shareholders, the main concern is to keep the shareholders happy. Shareholders infuse corporations they believe in ...view middle of the document...

Gross profit and net earnings are two key features to look at.
The price earnings ratio measures the relative valuation of earnings, (Block, 2005). This is a way of looking at how your company's stock earnings compare to other companies both within and outside your industry. This ratio is affected by many variables like marketability, sales growth, and the debt-equity structure of a company.
The balance sheet shows what a company owns, and whether that capital is financed or owned, (Block, 2005). The balance sheet is like a snapshot of the company at one point in time. Company assets may include real estate, plant and equipment, inventory, and investments--like securities. One key element of the balance sheet is liquidity. This refers to the ability to convert assets into cash.
The statement of cash flows is used to emphasize the critical nature of cash flow with respect to a company's operations, (Block, 2005). Like individuals, corporations have bills to pay. When an individual applies for a loan, the bank will look at a figure called the debt to income ratio. This ratio will tell the lender if the individual will be able to make their mortgage payments, car payments, utilities, etc. based on their current income. This is analogous to a company's cash flow statement.
Using this basic information, financial analysts can perform more detailed research on the numbers. Ratio analysis, The Dupont Analysis and Trend Analysis are three examples of how financial analysts can use numbers to determine strength of performance and return on investment, (Block, 2005).
When corporations are required to report their financials, they report by the Statement of Financial Accounting Standards, (SFAS), (Block, 2005)....

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