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Analysis - Coggle Diagram

- - - - = (Cash + ST investments + Receivables) / CL
      - Meaning: ability to pay short-term L without relying on inventory
      - High -> strong liquidity + Companies can pay debts without selling inventory.
      - Low -> if it cannot sell inventory fast enough -> may face liquidity issue
    - - = (cash + ST investment) / CL
      - meaning: ability to pay short-term liabilities using only cash and short-term investments.
      - Low ->: May struggle to meet short-term obligations without selling assets.
      - High ->: strong liquidity - can cover short-term debts using only cash. but holding too much idle cash
    - - = CA / CL
      - meaning: ability to pay short-term L by using current asset
      - High -> strong short-term liquidity but may have inefficienct asset use
      - Low -> struggle to meet the short term obligation
  - - - Long-term Debt to Equity:
        
        Long-term Debt / Equity
        
        High -> company can make use of financial leverage to expand business, however they also face financial risk if the cashflow in future is weak
      - Debt to equity (D/E):
        
        Total debt/Total shareholder’s equity
        
        High -> heavy reliance on debt, making the company more dependent on future cash flow. Some industries, like infrastructure (e.g., BOT projects), require significant initial investment and operate with high debt levels.
      - Debt to assets (D/A):
        
        Total debt/Total assets
        
        high -> funds most of its assets through borrowing, which raises financial risks but may allow for greater expansion.
        
        low - safer but can limit financial efficiency.
      - Financial leverage ratio:
        
        Average total assets/Average total equity
        
        High -> boost profit if business is good, but face financial burden of repaying debt and interest
        
        have stable finance but may grow more slowly
        
        how much a company relies on borrowed money to fund its assets compared to its equity.
    - - Interest coverage = EBIT/ Interest payments
      - Ability to cover interest expenses
  - - - increase ROE -> boost the shareholder return
      - financial leverage: enhance earning potential, but also increase financial risk
      - Tax shield: interest expense reduce taxable income -> lower tax liability
      - Have higher financial burden, pressure of paying interest expense
        -> if cashflow is weak -> may lead to risk of default
      - suddenly raise debt financing -> this could be a sign that company is raising capital to invest in a large project
    - - control sharing
        
        more shareholder -> Dillute decision making power of existing owners
      - independence
        
        no obligation to repay debt, low pressure of financial burden
      - safe financial structure, however may miss opportunity to maximize profit if there is a good deal
    - - Real estate company
        
        use more debt financing
        
        high initial cost require large loan
        
        cashflow of sale from future property sales help repay the debt.
      - Professional Services (Consulting, Law Firms, etc.)
        
        have low fixed asset
        
        rely on partners' capital rather than debt.
        
        more equity