A company’s financial statements can provide insight into not only how a company is doing financially but also in how efficient the company is at managing their finances. Gladstone (2004), reported that investing in a company with bad financial management would not be a smart investing choice. Through the financial analysis of the statements an investor can also determine the sources of financing that are available for a new venture. The financial statements can show how much has already been invested by the business owner and how much they would be able to pay back. The statements also indicate how much of the company is owned by the business owner. The higher rates of ownership that the entrepreneur has they would be more likely to return the investment. The financial statements indicate how much available capital a business has from revenue that could be used to fund investments. The financial statements can determine if the company is a good investment.
Through the analysis of the statements, ratios can be determined for both short- and long-term financing. For short term financing liquidity ratios can be determined by dividing current assets by current liabilities. Both cash and leverage ratios can be used to determine long term financing. Both types of ratio provide forecasts for future financial interaction with the business. Cash ratio provides an indication of how much cash is able to cover the inventory. This provides information on how long the company can run with the current amount of inventory and cash available. Leverage ratios measures how much the company has leveraged itself out in debt. This ratio can be used to determine how much available capital the company has to work with. This ratio also determines if the company can take on any more debt and what the long-term available options are for the company. An investor can plan for how long they want to be involved in the company through the use of these ratios to determine short versus long term financing options. This would improve the return on the investment for the investor.
Gladstone, D. J., & Gladstone, L. (2004). Venture Capital Investing: The Complete Handbook for Investing in Private Businesses for Outstanding Profits. FT Press.