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What is debt? Debt is money borrowed from a lender, typically a bank. In exchange for receiving cash, borrowers will repay the loan with interest. Interest compensates the lender for risking his cash, and are the costs a borrower must pay to use someone else’s money. Why is debt risky? Debt is risky because lenders […]

Asset-Heavy (Hungry) Businesses Asset-heavy businesses are companies that need a lot of assets to operate and are inefficient at turning those assets into sales and profit. Asset-heavy business models include rail companies, mines, refineries, construction, and manufacturers – businesses with substantial amounts of machines, plant & equipment, inventory, and/or accounts receivable. Asset-heavy businesses are called

A Quick Congratulations Hello, and welcome back to the “SMB Fundamentals” series. Let’s take a minute to congratulate you! We have covered some fundamental, and powerful concepts in finance. Now you know how to think about ROI, Investing for Growth, and Balance Sheets. Safe to say you are getting clued up without paying $60,000 for

ROI Ratios It must be ironic that I have spoken at length about ROI, perhaps ad nauseum, yet I haven’t told you how to calculate it. Well, you’re in luck! That is what we are about to do! Return on Investment is the ratio, expressed as a percentage, of the annual profit earned divided by

Financial Funding Ratios Another set of ratios we can use is what I call the Financial Funding Ratios. Equity Funding and the Liability Funding Ratios show who funds a company’s operations. Remember a balance sheet summarises what a company owns (assets) and how it financed the purchases (Liabilities and Equity). The ratios indicate whether a

Solvency Ratios A company’s solvency is its ability to pay off long-term debts, and obligations. Solvency ratios are important for owners because it shows the level of debt the company holds relative to the profit it generates, and how a company funds their purchases. As long as a company generates, or has, enough cash to

Liquidity Ratios Liquidity is a company’s ability to quickly convert assets into cash, to pay off short-term liabilities, or obligations without raising money 3rd-parties. The emphasis on liquidity is the short-term! Liquidity Ratios only concern the “Current” parts of a balance sheet. See below Companies need “liquidity” to cover their short-term liabilities and obligations. If

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

Balance Sheet Breakdown This post aims to get you comfortable with what a balance sheet is, and the main categories. Once we have a solid understanding of the key items, we will explore how to use the information on the balance sheet to provide insights. I will split my explanation of a balance sheet into