Last week we looked at cash flow to determine the financial health of a company here. Today we look at another aspect of the company’s financial health, namely its debt position.
In this respect the question which Harry Domash poses is ” is the company sinking deeper in debt or is it digging its way out?”. To determine this, simply perform the following functions:
1. divide total liabilities with total assets and compare this number year on year.
2. divide current assets with current liabilities and see whether this figure is increasing or decreasing.
This simple test will show you whether a company’s balance sheet is growing because of increasing business or increasing debt.
And that is it! Easy is in it? later on I will show how to put these tests together to form an overall picture of the company.
Happy trading!
