Financial health analysis looks at persons or company’s financial positions, which go a long way in helping one to make well-informed financial and business decisions. Through financial analysis, a business owner can come up with models that can address the economic woes experienced. However, in a business that has streamlined its process and isn’t making huge losses, financial health analysis will help the company strengthen any weak areas while also checking if the company can overcome the changes that occur with inflation and deflation.
There are four key financial ratios to be considered during a financial health report.
First, we have Profitability which looks at how productive a company is about its competitors. In Profitability, the main focus is on the balance sheet, which considers how much is coming in, what is going into operating costs, and the company’s income statement.
Secondly, solvency refers to how well a company can handle its creditor’s third parties and pay off all the debts in the case of SolvencySolvency. A company that can hold its debts quickly and efficiently can be an excellent investment to keep up with its financial obligations.
Thirdly we have efficiency, which refers to how well an organization can sustain its normal operations and manage its assets and liabilities despite fluctuations in the economy. This is done by checking the balance sheet versus the business turnover. A high turnover indicates efficiency in the company, whereas a low turnover indicates inefficiencies.
Lastly, liquidity refers to a company’s ability to take care of its short-term debt obligations. It is based upon a company’s balance sheet and cash flow.