5 C's Financial Analysis Calculator
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Quickly determine the 5 C's, credit worthiness, and estimated valuation of any small or mid-sized business using Activity, Debt, Liquidity, and Profitability ratio analysis.
THE 5 C's OF CREDIT
A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics of the borrower, attempting to gauge the chance of default.
The five Cs of credit are:
This method of evaluating a borrower incorporates both qualitative and quantitative measures. The first factor is character, which refers to a borrower's reputation. Capacity measures a borrower's ability to repay a loan by comparing income against recurring debts. The lender will consider any capital the borrower puts toward a potential investment, because a large contribution by the borrower will lessen the chance of default. Collateral, such as property or large assets, helps to secure the loan. Finally, the conditions of the loan, such as the interest rate and amount of principal, will influence the lender's desire to finance the borrower.
Source: [http://www.investopedia.com |Investopedia]
Created by Ryan McGregor
The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income.
⇥COST OF GOODS SOLD
The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company's gross margin. Also referred to as "cost of sales."
The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders or owners.
A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share.
⇥CASH & EQUIVALENTS
Investment securities that are short-term, have high credit quality and are highly liquid.
Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.
A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.
The total amount of all gross investments, cash and equivalents, receivables, and other assets as they are presented on the balance sheet.
A company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.
The total of all debts an individual or company is liable for. Total liabilities can be easily calculated by summing all of one's short-term and long-term liabilities, along with any off balance sheet liabilities which corporations may incur. On the balance sheet, total liabilities plus equity must equal total assets.
Earnings Before Interest, Taxes, Depreciation and Amortization. Used in calculating the "Estimated Business Value".
A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days."
This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.
Cost of Goods Sold
⇥AR TURNOVER (Accounts Receivable Turnover)
An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.
By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.
⇥DSO (Days Sales Outstanding)
A measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money.
Due to the high importance of cash in running a business, it is in a company's best interest to collect outstanding receivables as quickly as possible. By quickly turning sales into cash, a company has the chance to put the cash to use again - ideally, to reinvest and make more sales. The DSO can be used to determine whether a company is trying to disguise weak sales, or is generally being ineffective at bringing money in. For most businesses, DSO is looked at either quarterly or annually.
⇥DEBT TO EQUITY
A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.
A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5.
⇥DEBT TO ASSETS
A financial ratio that measures the extent of a company’s or consumer’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company’s assets that are financed by debt.
A debt ratio of greater than 1 indicates that a company has more debt than assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's risk level.
A firm's total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity represents the amount by which a company is financed through common and preferred shares.
Shareholders' equity comes from two main sources. The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter. The second comes from retained earnings which the company is able to accumulate over time through its operations. In most cases, the retained earnings portion is the largest component.
Assets - Liabilities
A liquidity ratio that measures a company's ability to pay short-term obligations.
The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.
An indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets.
The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. Thus, a quick ratio of 1.5 means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities. The higher the quick ratio, the better the company's liquidity position. Also known as the "acid-test ratio" or "quick assets ratio."
(Current Assets - Inventory)
⇥GROSS PROFIT %
A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.
The Gross Margin % is not an exact estimate of the company's pricing strategy but it does give a good indication of financial health. Without an adequate gross margin, a company will be unable to pay its operating and other expenses and build for the future. In general, a company's gross profit margin should be stable. It should not fluctuate much from one period to another, unless the industry it is in has been undergoing drastic changes which will affect the costs of goods sold or pricing policies.
(Revenue - Cost of Goods Sold)
⇥NET PROFIT %
The ratio of net profits to revenues for a company or business segment - typically expressed as a percentage – that shows how much of each dollar earned by the company is translated into profits.
Net Profit % will vary from company to company, and certain ranges can be expected from industry to industry, as similar business constraints exist in each distinct industry. A company like Wal-Mart has made fortunes for its shareholders while operating on net margins less than 5% annually, while at the other end of the spectrum some technology companies can run on net margins of 15-20% or greater.
Return on Assets % is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment".
Return on Assets % tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA numbers or the ROA of a similar company.
Return on Equity % is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
The Return on Equity % is useful for comparing the profitability of a company to that of other firms in the same industry.
ESTIMATED BUSINESS VALUATION
⇥LOW BUSINESS VALUATION
Small businesses where the owner is the business and if sold a new clientele may need to be sought. No client contracts in place, non professional services. Cafés, small non franchise restaurants, dry cleaners, barber shops, non franchise businesses.
EBITDA + Salaries + Inventory + Building = Total Business Value
⇥HIGH BUSINESS VALUATION
Businesses that are greater than 3 yrs old with loyal clientele based on location or specialized services. Usually have large clientele base that cannot easily migrate to a competitor out of necessity and trust of services or location. Not dependent on out going owner. Professional services, franchises and contract based businesses with valid long term contracts in place. Doctors, dentists, veterinarians, lawyers, accountants, commercial construction companies, companies holding utility patents and or recognizable trademarks etc.
(EBITDA + Salaries) x 3) + Inventory + Building = Total Business Value
Results are confirmed as at
Cost of Goods Sold
Total Owner's Salaries
Cash & Equivalents
Inventory Turnover (Higher is Better)
AR Turnover (Higher is Better)
DSO (Lower is Better)
Debt-to-Equity (Lower is Better)
Debt-to-Asset (Lower is Better)
Shareholder's Equity (Higher is Better)
Current Ratio (Higher is Better)
Quick Ratio (Higher is Better)
Gross Profit % (Higher is Better)
Net Profit % (Higher is Better)
ROA % (Higher is Better)
ROE % (Higher is Better)
Low Business Valuation*
High Business Valuation*