What are some of the measures used to evaluate the financial stability of a company?
When a firm pays off all its expenses, liabilities and is running smoothly with bright future prospects and without having any issue on the cash flows that is going to be used, then we can say that the firm is financially stable. However, there are many other factors that determine the financial stability of a company. Some of them are as follows:
i)Growth rate in revenue of a company: A company with a stable growth rate in annual sales is more stable compared to a company with highly fluctuating or declining sales numbers. The reason behind highly fluctuating or declining sales numbers should be seen skeptically and must be examined.
ii) Debt to equity ratio: A low debt to equity ratio is preferred. Although taking leverage has its benefits, but beyond a certain level it can be detrimental for the financial stability of a company. When a company fails to pay off its debt for a certain period of time, then the possibility of the company becoming insolvent gets higher.
iii) Positive annual cash flows: Even if a company is reporting higher revenues and higher net income, if higher percentage of the revenues goes under accounts receivable, then the cash flow will decrease. If the accounts receivables increases year on year and the company gets a very less amount of cash flow compared to the revenue (or the net income), then the company will fail to pay off its expenses, liabilities and may become financially unstable in long run.
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