Articles
Liquidity indicators
Liquidity is the entity´s ability to convert its assets into cash for the purpose to settle its obligations, ideally with the lowest possible transaction costs. (14) Indicators of liquidity Liquidity indicators show the extent to which the current assets of the company in various forms cover its short-term obligations. Thus, the num...
Disadvantages of accounting profit
Profit as a basic profitability indicator used by companies has the following drawbacks: profit does not equal net inflow of money, costs do not equal expenditures and incomes do not equal receipts profit includes the results of operations that are ad-hoc and will not be repeated in the future various methodologies particularly in the ar...
Net present value (NPV)
Net present value (NPV) is a method for investment appraisal that is based on discounted cash-flow methodology. It shows the amount by which shareholder´s wealth would be increased. It is calculated as the total of present values of future relevant cash-flows over the project life. It comes out from relevant future cash-flows (free cash-flow)...
Standard costing
Standard costing is a cost accounting measurement basis that predicts unit costs and production quantities based on predetermined standards before the production even begins and as such it is an alternative method to historical cost accounting. It is suitable for production, which is standardized and mass or repetitive. Standard costing serves as...
Distinction between economic and accounting profit
The general definition is valid for both economic and accounting profit: income - expenses But the terms differ in: what is included in the formula: economic profit: explicit (i.e. expenses in the profit and loss) and implicit costs (i.e. costs that would be sacrified if we would
Advantages and disadvantages of financing by equity and debt
In business world, debt financing is paradoxically cheaper than from equity, because: the cost of debt is interest, which is lower than the dividend (profit sharing) paid to shareholders – it is mainly due to the fact that equity holders are satisfied in case of liquidation either after deb
Financial leverage
Financial leverage is the ratio of debt capital to total assets, i.e. the formula is the same as for the Debt ratio. The effect of financial leverage is one of the effects causing the fact that the use of debt capital can be more advantageous than equity. It has a positive effect in the case that r
Solvency
Solvency is the ability to pay the obligations on time. (14) Solvency is not the same as liquidity. Solvency ratio / Cash-flow ratio belongs to the group of indicators of liquidity and financial structure/indebtedness and expresses the entity's ability to meet all its liabilities (both
Liquid assets
Liquid assets are current assets that will or could be converted into cash in a short period of time.
Opportunity costs / Implicit costs
Opportunity cost (also called also implicit costs) is the highest possible amount that could be obtained if different alternative would have been adopted. For example rent income can be opportunity costs to using the factory premises for manufacturing. Opposite to implicit (opportunity) costs
Difference between terms liquidity, solvency and liquidity of assets
There is a difference between the related terms of liquidity, solvency and liquidity of assets. Liquidity Liquidity is the entity´s ability to convert its assets into cash for the purpose to settle its obligations, ideally with the lowest possible transaction costs. (14) More here.
Net working capital
Net working capital is obtained by subtracting short-term borrowings from (gross) working capital. Calculation formula working capital - short-term borrowings = current assets - short-term borrowings = long-term debt capital + equity – non-current assets General interpretati
The indicator of overcapitalization / undercapitalization
The indicator of overcapitalization / undercapitalization is one of the indicators of indebtedness and financial structure and possibly also liquidity. The ratio indicates the proportion in which are fixed assets financed by long-term funds. The analysis provides similar result as the analysi
Liquidity
Liquidity is the entity´s ability to convert its assets into cash for the purpose to settle its obligations, ideally with the lowest possible transaction costs. (14) Liquidity is not the same as solvency. Financial analysis deals with the following liquidity indicators.
Compound annual growth rate (CAGR)
Compound annual growth rate (CAGR) is method used to calculate annual grow rate from time series. The result of CAGR is interpreted as the smoothed annualized growth rate achieved during the considered time horizon. It therefore represents the rate at which the variable would have grown if the rat
Economic profit
Economic profit: income - explicit and implicit costs It is a concept arising from general economic theory and its purpose is to evaluate the success of the company. The difference between the economic and accounting profit is described in this article.