Intro
Last time we broke down a balance sheet, explored the main parts and their functions. Today, we are going to take out our understanding of what a balance sheet is and use it to come up with insights into a business. Our discussion will focus on the four ratio categories below.
Ratio Types
The four main ratio categories!
For each ratio, we will look at why is is important and and how it helps assess the quality and financial condition of a business.
Personally, I find the best way to learn is through example. We are going to see a mix of Charlie’s business mistakes, as well as looking at public company called West Pharmaceuticals. Let me give some background to the company.
West Pharmaceuticals designs and manufactures the injectable drugs packaging, and delivery systems. Drug packaging has a high impact on failure (patients’ lives are at risk) while costs are a percentage of the final retail price. In addition, Pharma/Biotech companies include packagers of a drug’s approval application with the FDA where the average drug approval costs $1.3B! The product quality and the packager’s financial stability are mission-critical and not worth trying to save money on cheaper alternatives. The company was founded more than 100 years ago allowing expertise in production quality and navigating the regulatory processes. West Pharmaceuticals seems like a great business… do the numbers agree?