Accounting Play Podcast: Learn Accounting

About the Podcast Tax-Aid is a non-profit that provides free income tax preparation services to taxpayers earning less than $53,000. This amazing organization provides a wonderful service to underserved individuals and communities. For the inspiring and professional tax preparer, the organization provides a resource to help others, and as we will learn on the Podcast, […]

About the Podcast Tax-Aid is a non-profit that provides free income tax preparation services to taxpayers earning less than $53,000. This amazing organization provides a wonderful service to underserved individuals and communities. For the inspiring and professional tax preparer, the organization provides a resource to help others, and as we will learn on the Podcast, possibly help your career. More on the podcast and article. Over 5,000 Returns Filed Tax-Aid has organizational roots in tax preparation for lower income tax preparers and also offers a financial coaching program. I have always been impressed at the reach of this Bay Area organization which in 2015 alone filed over 5,023 returns, which resulted in a total of $5.1M in refunds. A total of 704 volunteers participated from beginner tax preparers, aspiring CPAs, and even partners of large accounting firms.   The Need Tax preparation is complicated and the costly – even for basic returns. Often low income tax preparers file inaccurate returns or miss out on the Earned Income Tax Credit, which can be thought of as a massive tax reduction or even refund in excess of tax owed to those that qualify. Alternatives of low cost preparation which often sell high-cost loans can be especially costly to the low-income taxpayer. From my firsthand experience, seeing these types of returns filed can provide a valuable economic benefit and make taxpayers feel good about being timely.   An Amazing Training Opportunity Tax-Aid will not only train you, but you will be surrounded by others in the field! What an amazing opportunity to help others, while at the same time helping yourself. Knowing others who help file returns can form an initial network of professionals to bounce ideas off of. Get contacts and deep relationships by performing this great service.   Per Tax-Aid Tax-Aid is a non-profit that provides free income tax preparation services to taxpayers earning less than $53,000. We want to make sure that families and individuals receive the refunds they earn and other credits such as the Earned Income Tax Credit (EITC). This tax season, we had 29 tax sites throughout seven counties in the Bay Area; San Francisco, San Mateo, Marin, Santa Clara, Alameda, Contra Costa and Napa. Tax-Aid’s bilingual volunteers offer services to clients in Spanish, Chinese, Vietnamese, Russian, and Tagalog. In 2015, Tax-Aid returned $5.1M in refunds to 5,023 clients with the help of 704 volunteers. The Average Gross Income (AGI) of Tax-Aid clients in the 2013 filing season was $19,778 Since its first tax season in 1988, Tax-Aid has served a total of 58,721 clients and returned $57M in refunds. To find a tax site near you, please visit: tax-aid.org.   Other programs: Tax-Aid also has a financial coaching program where trained volunteer coaches are matched with clients to set and work towards a goal related to increasing savings, reducing debt or increasing a credit score. Coaches positively support their clients for six months to enhance their financial capability.   Other FAQs: When was organization founded? Organization started in 1988. How much do you charge for your services? Nothing! Our services are free. What is the EITC? The Earned Income Tax Credit has been helping low- to moderate-income workers by giving them a boost to their income. If you worked and earned under $53,000, you may be eligible for EITC. The EITC reduces your federal tax and could result in a refund. The EITC can boost the annual income of a low-wage worker by as much as 10%[1]. Do volunteers need to be a tax expert or CPA to volunteer? No, we provide training. There is always an experienced tax preparer at our tax sites. Where do people get more information on tax preparation or volunteering?

About the Podcast Tax-Aid is a non-profit that provides free income tax preparation services to taxpayers earning less than $53,000. This amazing organization provides a wonderful service to underserved individuals and communities. For the inspiring and professional tax preparer, the organization provides a resource to help others, and as we will learn on the Podcast, possibly help your career. More on the podcast and article. Over 5,000 Returns Filed Tax-Aid has organizational roots in tax preparation for lower income tax preparers and also offers a financial coaching program. I have always been impressed at the reach of this Bay Area organization which in 2015 alone filed over 5,023 returns, which resulted in a total of $5.1M in refunds. A total of 704 volunteers participated from beginner tax preparers, aspiring CPAs, and even partners of large accounting firms.   The Need Tax preparation is complicated and the costly – even for basic returns. Often low income tax preparers file inaccurate returns or miss out on the Earned Income Tax Credit, which can be thought of as a massive tax reduction or even refund in excess of tax owed to those that qualify. Alternatives of low cost preparation which often sell high-cost loans can be especially costly to the low-income taxpayer. From my firsthand experience, seeing these types of returns filed can provide a valuable economic benefit and make taxpayers feel good about being timely.   An Amazing Training Opportunity Tax-Aid will not only train you, but you will be surrounded by others in the field! What an amazing opportunity to help others, while at the same time helping yourself. Knowing others who help file returns can form an initial network of professionals to bounce ideas off of. Get contacts and deep relationships by performing this great service.   Per Tax-Aid Tax-Aid is a non-profit that provides free income tax preparation services to taxpayers earning less than $53,000. We want to make sure that families and individuals receive the refunds they earn and other credits such as the Earned Income Tax Credit (EITC). This tax season, we had 29 tax sites throughout seven counties in the Bay Area; San Francisco, San Mateo, Marin, Santa Clara, Alameda, Contra Costa and Napa. Tax-Aid’s bilingual volunteers offer services to clients in Spanish, Chinese, Vietnamese, Russian, and Tagalog. In 2015, Tax-Aid returned $5.1M in refunds to 5,023 clients with the help of 704 volunteers. The Average Gross Income (AGI) of Tax-Aid clients in the 2013 filing season was $19,778 Since its first tax season in 1988, Tax-Aid has served a total of 58,721 clients and returned $57M in refunds. To find a tax site near you, please visit: tax-aid.org.   Other programs: Tax-Aid also has a financial coaching program where trained volunteer coaches are matched with clients to set and work towards a goal related to increasing savings, reducing debt or increasing a credit score. Coaches positively support their clients for six months to enhance their financial capability.   Other FAQs: When was organization founded? Organization started in 1988. How much do you charge for your services? Nothing! Our services are free. What is the EITC? The Earned Income Tax Credit has been helping low- to moderate-income workers by giving them a boost to their income. If you worked and earned under $53,000, you may be eligible for EITC. The EITC reduces your federal tax and could result in a refund. The EITC can boost the annual income of a low-wage worker by as much as 10%[1]. Do volunteers need to be a tax expert or CPA to volunteer? No, we provide training. There is always an experienced tax preparer at our tax sites. Where do people get more information on tax preparation or volunteering?

How to start making money with bookkeeping and maybe even work from home “I'm trying to re-learn bookkeeping with the idea of working from home. My health now requires me to look for a way to earn a living where I can have a more flexible work schedule” -WPL   The work from home dream […]

How to start making money with bookkeeping and maybe even work from home “I'm trying to re-learn bookkeeping with the idea of working from home. My health now requires me to look for a way to earn a living where I can have a more flexible work schedule” -WPL   The work from home dream Ahhh bookkeeping and the dream of working from home. Picture with me for a second, late 90s clipart with a happy person on a lonely tropical beach watching their four inch laptop screen, blocked only by a delightful pineapple cocktail sporting an umbrella only slightly smaller than the umbrella that is providing shade from that darn tropical sun – enough shade so that the mysterious (coincidently young and beautiful) person can just barely see the money rolling into what is also presumed to be tax free offshore accounts. Yes this is the fantasy life of remote accounting, which I think (myself included) to aspire to. Just say NO to cubes Remote accounting and my reality After two years of working 60 hour weeks (when counting BS and networking time) I finally felt comfortable to work remote for three weeks in Panama. I picked Panama for two primary reason, one that personifies the accounting stereotype “it was cheap” and one a little more interesting “surf on two coasts!” Conveniently I was also able to get my USA iPhone to work down there sufficiently for about fifty bucks, not bad. Let me contrast the clipart scene with reality. Imagine a younger male dude, face white from extra dosses of sunscreen sitting in the restaurant bar as close to wifi as possible, headphones in to block distractions, hoping the electricity does not go out, and answering email. I mean, hey, it kinda worked!   Bookkeeping as a profession is rapidly evolving Back in my day I had to walk to my first job at Snyder Accountancy uphill, both ways, in the snow, which is quite rare for the California coastline. I was hired because I took one semester at junior college which consisted of USA taxes 101, accounting, and accounting with software. On the first day my wonderful manager Dacia Mendoza sat me in front of some archaic PC based software and I started entering transactions from cancelled bank checks. This was a Carmel Valley taqueria I was salivating as I entered in the food and beverage costs… tortillas, cervezas, salsa… After entering in the transactions and coding them to appropriate accounts, I then performed a bank rec. Day 1 I was learning the ropes and useful to the firm. But now the same task that took me two hours can take twenty-four minutes. Getting hired in the new era requires experience and education – It is very difficult to show up to an accounting firm and be valuable without some formal training “these days.” The issue at hand is that the training headache does not create any benefit for the firm. Unfortunately CPAs and firms often adopt, “It is just easier for me to do it” mentality. The answer to this is to get the education that gives you the most value for the money. The reciprocal result is that the more valuable your educational choices are the more valuable you will be to the firm. Here are some thoughts: Junior college is your best friend Take low cost junior college courses: Accounting basics / bookkeeping, Excel for accounting, Excel in general, Beginning tax preparation classes Study to learn Beware of certificate courses – you are much better served going to junior college, owning your classes, and getting any kind of experience possible Some Junior Colleges offer even intermediate accounting, may have more engaged instructors with smaller classroom sizes, hopefully connected to the community, and often have online options One semester of junior college (JC) courses: Excel, Accounting 101, Computer Software and Accounting,

How to start making money with bookkeeping and maybe even work from home “I'm trying to re-learn bookkeeping with the idea of working from home. My health now requires me to look for a way to earn a living where I can have a more flexible work schedule” -WPL   The work from home dream Ahhh bookkeeping and the dream of working from home. Picture with me for a second, late 90s clipart with a happy person on a lonely tropical beach watching their four inch laptop screen, blocked only by a delightful pineapple cocktail sporting an umbrella only slightly smaller than the umbrella that is providing shade from that darn tropical sun – enough shade so that the mysterious (coincidently young and beautiful) person can just barely see the money rolling into what is also presumed to be tax free offshore accounts. Yes this is the fantasy life of remote accounting, which I think (myself included) to aspire to. Just say NO to cubes Remote accounting and my reality After two years of working 60 hour weeks (when counting BS and networking time) I finally felt comfortable to work remote for three weeks in Panama. I picked Panama for two primary reason, one that personifies the accounting stereotype “it was cheap” and one a little more interesting “surf on two coasts!” Conveniently I was also able to get my USA iPhone to work down there sufficiently for about fifty bucks, not bad. Let me contrast the clipart scene with reality. Imagine a younger male dude, face white from extra dosses of sunscreen sitting in the restaurant bar as close to wifi as possible, headphones in to block distractions, hoping the electricity does not go out, and answering email. I mean, hey, it kinda worked!   Bookkeeping as a profession is rapidly evolving Back in my day I had to walk to my first job at Snyder Accountancy uphill, both ways, in the snow, which is quite rare for the California coastline. I was hired because I took one semester at junior college which consisted of USA taxes 101, accounting, and accounting with software. On the first day my wonderful manager Dacia Mendoza sat me in front of some archaic PC based software and I started entering transactions from cancelled bank checks. This was a Carmel Valley taqueria I was salivating as I entered in the food and beverage costs… tortillas, cervezas, salsa… After entering in the transactions and coding them to appropriate accounts, I then performed a bank rec. Day 1 I was learning the ropes and useful to the firm. But now the same task that took me two hours can take twenty-four minutes. Getting hired in the new era requires experience and education – It is very difficult to show up to an accounting firm and be valuable without some formal training “these days.” The issue at hand is that the training headache does not create any benefit for the firm. Unfortunately CPAs and firms often adopt, “It is just easier for me to do it” mentality. The answer to this is to get the education that gives you the most value for the money. The reciprocal result is that the more valuable your educational choices are the more valuable you will be to the firm. Here are some thoughts: Junior college is your best friend Take low cost junior college courses: Accounting basics / bookkeeping, Excel for accounting, Excel in general, Beginning tax preparation classes Study to learn Beware of certificate courses – you are much better served going to junior college, owning your classes, and getting any kind of experience possible Some Junior Colleges offer even intermediate accounting, may have more engaged instructors with smaller classroom sizes, hopefully connected to the community, and often have online options One semester of junior college (JC) courses: Excel, Accounting 101, Computer Software and Accounting,

I quit my temp job after 4 hours today and hope I learned something in the process. Why Work an Accounting Temp Job? Temp jobs have been instrumental in the early stages of Gillingham CPA as I built my firm one client at a time. They helped pay the rent as I then turned to […]

I quit my temp job after 4 hours today and hope I learned something in the process. Why Work an Accounting Temp Job? Temp jobs have been instrumental in the early stages of Gillingham CPA as I built my firm one client at a time. They helped pay the rent as I then turned to my own goals at night. Here is how it generally works… A company gets desperate for last minute help so they contract a recruiting firm for some quick and dirty labor. The temp firm might charge the company, say $75 an hour and the temp worker receives about half of that. Generally you have a company in some degree of panic mode with performance (superhuman) expectations of the rate they are paying the temp firm.   You better like learning fast and taking orders Temp workers are the lowest on any corporate totem pole. In fact, they don’t even exist in the company org chart (which will be provided you week one). The very nature of the employment guarantees the temp workers expendability. Day 1 – get your logins and start filling up notepads as a manager, or more likely manager substitute explains what took them three months to learn in three hours. I suggest having your best notepad, computer, or some kind of documentation instantly. Be well rested and ready because it is always a rapid ramp up. Forget the welcome emails, you are expected to produce in hour two of employment. I and big corporate accounting… I am be zazen about my momentary feelings. I respect grinding corporate accounting efficiency, but Jeeeeez! So I love small business. Corporation… The desks… the vibe… ugh.   If you can survive The doggy dog temp world is an opportunity to learn, perform, and meet people within the industry. Perform well enough and you can even take the place of your manager! Through any challenge and nasty dynamics that don’t crush your soul or nerves, you can become “stronger.” Looking at the surrounding staff you might really think that you would be weaker if you continued, but let’s be optimistic. Temp work gives trial by fire in managing yourself and managing managers. Managing managers? Yes. You will need to learn how to manage the expectations of others and confidently push back on unrealistic goals.   It is a paid internship Seeing other companies, learning different procedures, and being challenged are wonderful opportunities. Take an eight hour temp assignment and figure it might require another two hours after to fill in work and educational needs on the side. This can be ok if you treat it right. Things such as Vlookups and Pivot Tables in excel may be commonplace temp worker expectations, but absent of any of your accounting curriculum. You must learn it on your own, on the job, and fast. I hate badges, elevators with no buttons, and especially extra badges to access rooms within the badged building and badged button-less elevators The big corporate life is just not for me. The extreme specialization which makes extreme productivity possible drives me extremely crazy. Being back in the corporate environment brought me back to the HID badge world of a prior life I tried to forget. 3-badges before your reach the super secret windowless accounting room? Yes that does exist. I loathe motivational posters everywhere. Encouragements that imply the corporate work had larger spiritual significance. Computers. Lots of dual screen PCs, docking stations, and about 25 logins. 24 of which barely work. My manager tried to print something and it took ten minutes for it to print, what year is it?   Director sounds so good, but looks like... Director is just someone with more work and unlike the 80s, sits in a cube or open floor cube-light floor plan. I see energy drinks, half-finished plates of food from catered breakfast designed to keep the worklings working. Some have standing desks – yes there is humanity in all of it. Luckily the ERP software takes some time to load a report and I get to chat with my manager.

I quit my temp job after 4 hours today and hope I learned something in the process. Why Work an Accounting Temp Job? Temp jobs have been instrumental in the early stages of Gillingham CPA as I built my firm one client at a time. They helped pay the rent as I then turned to my own goals at night. Here is how it generally works… A company gets desperate for last minute help so they contract a recruiting firm for some quick and dirty labor. The temp firm might charge the company, say $75 an hour and the temp worker receives about half of that. Generally you have a company in some degree of panic mode with performance (superhuman) expectations of the rate they are paying the temp firm.   You better like learning fast and taking orders Temp workers are the lowest on any corporate totem pole. In fact, they don’t even exist in the company org chart (which will be provided you week one). The very nature of the employment guarantees the temp workers expendability. Day 1 – get your logins and start filling up notepads as a manager, or more likely manager substitute explains what took them three months to learn in three hours. I suggest having your best notepad, computer, or some kind of documentation instantly. Be well rested and ready because it is always a rapid ramp up. Forget the welcome emails, you are expected to produce in hour two of employment. I and big corporate accounting… I am be zazen about my momentary feelings. I respect grinding corporate accounting efficiency, but Jeeeeez! So I love small business. Corporation… The desks… the vibe… ugh.   If you can survive The doggy dog temp world is an opportunity to learn, perform, and meet people within the industry. Perform well enough and you can even take the place of your manager! Through any challenge and nasty dynamics that don’t crush your soul or nerves, you can become “stronger.” Looking at the surrounding staff you might really think that you would be weaker if you continued, but let’s be optimistic. Temp work gives trial by fire in managing yourself and managing managers. Managing managers? Yes. You will need to learn how to manage the expectations of others and confidently push back on unrealistic goals.   It is a paid internship Seeing other companies, learning different procedures, and being challenged are wonderful opportunities. Take an eight hour temp assignment and figure it might require another two hours after to fill in work and educational needs on the side. This can be ok if you treat it right. Things such as Vlookups and Pivot Tables in excel may be commonplace temp worker expectations, but absent of any of your accounting curriculum. You must learn it on your own, on the job, and fast. I hate badges, elevators with no buttons, and especially extra badges to access rooms within the badged building and badged button-less elevators The big corporate life is just not for me. The extreme specialization which makes extreme productivity possible drives me extremely crazy. Being back in the corporate environment brought me back to the HID badge world of a prior life I tried to forget. 3-badges before your reach the super secret windowless accounting room? Yes that does exist. I loathe motivational posters everywhere. Encouragements that imply the corporate work had larger spiritual significance. Computers. Lots of dual screen PCs, docking stations, and about 25 logins. 24 of which barely work. My manager tried to print something and it took ten minutes for it to print, what year is it?   Director sounds so good, but looks like... Director is just someone with more work and unlike the 80s, sits in a cube or open floor cube-light floor plan. I see energy drinks, half-finished plates of food from catered breakfast designed to keep the worklings working. Some have standing desks – yes there is humanity in all of it. Luckily the ERP software takes some time to load a report and I get to chat with my manager.

Cash Flow Ratios Audio Cash Flow Ratios Topics Summary Operating Cash Flow / Sales Ratio Free Cash-Flow / Operating Cash Ratio Cashflow Coverage Ratio   Summary Cash flow is the actual amount of cash generated or lost by an entity during the course of operations. Cash and cash flow are important mainly because it is […]

Cash Flow Ratios Audio Cash Flow Ratios Topics Summary Operating Cash Flow / Sales Ratio Free Cash-Flow / Operating Cash Ratio Cashflow Coverage Ratio   Summary Cash flow is the actual amount of cash generated or lost by an entity during the course of operations. Cash and cash flow are important mainly because it is perhaps the ultimate indicator of a company’s attractiveness, success or health. As they say, “Cash is King.” The main reason for pursuing any business activity is ultimately to make money. Successful well-performing businesses have enough cash to comfortably make timely payments to creditors and lenders, meet operating expenses and pursue growth and expansion initiatives. Companies that are short on cash are in just the opposite position and can over time be at risk of insolvency. Cash is a factor in evaluating solvency, liquidity, growth potential, efficiency and the quality of management overall. Understanding cash flow is so significant that financial statements usually include the statement of cash flows which is devoted entirely to this one factor. The statement is divided into three parts: operating, financing and investing.   Operating Cash Flow / Sales Ratio The operating cash flow / sales ratio is limited by its very nature. This ratio just gives a very broad or general idea about how well a company can convert sales into cash. Without a real standard benchmark to rely upon to evaluate the result, using trend analysis and peer analysis is important. When evaluating this ratio over multiple time periods, an analyst should expect to see a reasonably consistent relationship between cash flow and sales. When sales increase, so should cash flow. If this consistency is not present, further analysis should be pursued. Some factors to look for in such a situation might include changes in sale terms, potential credit issues with buyers or issues with managing trade receivables.   Free Cash-Flow / Operating Cash Ratio Free cash-flow / operating cash flow is a significant ratio for users interested in understanding cash that may be available for additional activities. When evaluating this measure, the higher resulting ratio is better. Most credit analysts and many investment analysts consider free cash flow the most important factor to consider when making recommendations. Good results give comfort to creditors and investors alike. High levels of free cash flow are evidence of a well performing operation and enable financial flexibility in decision making, strategic planning and the overall company management process. Peer analysis is helpful in identifying comparable standards and evaluations.   Cashflow Coverage Ratio In its base application, the cash flow coverage ratio estimates a company’s ability to meet its interest expense with available free cash flow. The ratio is included in the cash flow group but is also a measure of liquidity or solvency. A higher result is almost always better and a comfortable minimum standard should be at least 1.5x given that other payments, not simply interest expense, can be present. Many users place high value on this ratio, in particular lenders. It is an important indication of financial condition and company quality. Correctly evaluating the quality of cash flow coverage is critical for many reasons. Some other coverage examples include loan principal repayment, preferred stock coverage, capital expenditure coverage, dividend coverage, and other similar uses. Analysts that understand their target company, its industry and the purpose behind the analysis being conducted will find ways to best apply the concept of coverage in the course of their work.     Valuation Ratios Audio Valuation Ratios Topics Summary Price/Book Value Ratio Earnings per Share Price to Earnings per Share Price/Earnings to Growth Ratio

Cash Flow Ratios Audio Cash Flow Ratios Topics Summary Operating Cash Flow / Sales Ratio Free Cash-Flow / Operating Cash Ratio Cashflow Coverage Ratio   Summary Cash flow is the actual amount of cash generated or lost by an entity during the course of operations. Cash and cash flow are important mainly because it is perhaps the ultimate indicator of a company’s attractiveness, success or health. As they say, “Cash is King.” The main reason for pursuing any business activity is ultimately to make money. Successful well-performing businesses have enough cash to comfortably make timely payments to creditors and lenders, meet operating expenses and pursue growth and expansion initiatives. Companies that are short on cash are in just the opposite position and can over time be at risk of insolvency. Cash is a factor in evaluating solvency, liquidity, growth potential, efficiency and the quality of management overall. Understanding cash flow is so significant that financial statements usually include the statement of cash flows which is devoted entirely to this one factor. The statement is divided into three parts: operating, financing and investing.   Operating Cash Flow / Sales Ratio The operating cash flow / sales ratio is limited by its very nature. This ratio just gives a very broad or general idea about how well a company can convert sales into cash. Without a real standard benchmark to rely upon to evaluate the result, using trend analysis and peer analysis is important. When evaluating this ratio over multiple time periods, an analyst should expect to see a reasonably consistent relationship between cash flow and sales. When sales increase, so should cash flow. If this consistency is not present, further analysis should be pursued. Some factors to look for in such a situation might include changes in sale terms, potential credit issues with buyers or issues with managing trade receivables.   Free Cash-Flow / Operating Cash Ratio Free cash-flow / operating cash flow is a significant ratio for users interested in understanding cash that may be available for additional activities. When evaluating this measure, the higher resulting ratio is better. Most credit analysts and many investment analysts consider free cash flow the most important factor to consider when making recommendations. Good results give comfort to creditors and investors alike. High levels of free cash flow are evidence of a well performing operation and enable financial flexibility in decision making, strategic planning and the overall company management process. Peer analysis is helpful in identifying comparable standards and evaluations.   Cashflow Coverage Ratio In its base application, the cash flow coverage ratio estimates a company’s ability to meet its interest expense with available free cash flow. The ratio is included in the cash flow group but is also a measure of liquidity or solvency. A higher result is almost always better and a comfortable minimum standard should be at least 1.5x given that other payments, not simply interest expense, can be present. Many users place high value on this ratio, in particular lenders. It is an important indication of financial condition and company quality. Correctly evaluating the quality of cash flow coverage is critical for many reasons. Some other coverage examples include loan principal repayment, preferred stock coverage, capital expenditure coverage, dividend coverage, and other similar uses. Analysts that understand their target company, its industry and the purpose behind the analysis being conducted will find ways to best apply the concept of coverage in the course of their work.     Valuation Ratios Audio Valuation Ratios Topics Summary Price/Book Value Ratio Earnings per Share Price to Earnings per Share Price/Earnings to Growth Ratio

Debt and Solvency Ratios Audio Debt and Solvency Ratios   Topics Introduction Debt Ratio Debt to Equity Ratio Equity Ratio Capitalization Ratio Cash Flow to Debt   Introduction Solvency is the ability of a company to meet its long-term financial obligations. This ratio group is concerned with identifying absolute and relative levels of debt, financial […]

Debt and Solvency Ratios Audio Debt and Solvency Ratios   Topics Introduction Debt Ratio Debt to Equity Ratio Equity Ratio Capitalization Ratio Cash Flow to Debt   Introduction Solvency is the ability of a company to meet its long-term financial obligations. This ratio group is concerned with identifying absolute and relative levels of debt, financial leverage, and capital structure. These ratios allow users to gauge the degree of inherent financial risk, as well as the potential of insolvency. Financial risk is a relative measure; the absolute amount of debt used to finance assets and operations is by itself not that meaningful. In other words, there is no right or wrong amount of debt. The company may be evaluating in context of ability to carry or service liabilities.   Debt Ratio The debt ratio is the most basic indicator of solvency which identifies the percentage of assets that are funded by liabilities. There is no set rule for the result but one could expect to see a rough range of results between 60%-80% across a broad spectrum of most industries. Financial institutions conversely are highly leveraged and ratios with results of 90%+ are common. Ratios below 50% are infrequent, with the possible exception of small family owned businesses. This ratio by itself is not especially important. It tells the level of debt or leverage, but the result needs to be considered in relation to the enterprise as a whole. High leverage can be positive if the company is able to support and take advantage of it. This ratio is therefore a starting point to solvency analysis. Analysts will quickly move on from this point by focusing attention to the composition of liabilities, earnings, cash flow, and coverage.   Debt to Equity Ratio The debt to equity ratio provides a different perspective on the manner in which a company funds its assets. It is a measure of leverage and a preliminary indicator of solvency. As with the debt ratio, there is no standard generic benchmark from which to judge all companies. This metric should be considered in large part by the industry type being analyzed while performing quality peer group analysis. Trend analysis (comparing company results over a number of years) is also helpful in understanding debt to equity ratio. Should the ratio results rise over time, for example, this trend would likely suggest increased use of bank financing or worse, signal operational issues. Such a trend would require further attention and investigation.   Equity Ratio In almost all cases, a strong equity to assets ratio is a positive sign, especially from a risk or solvency perspective. A high equity ratio is generally a common trait of quality, well performing companies. The equity ratio by itself, however, does not explain how the level of equity was achieved. A high degree of equity can be present for a variety of reasons, from seed funded startups to long-running, historically successful companies with significant retained earnings. Another possible event that could distort the usefulness of this measure could be a large secondary common stock offering. Lower relative amounts of equity can occur simply for industry-specific reasons such as the case with commercial banks or investment brokerages. This result could be also driven by an over-leveraged capital structure (too much debt) or net operating losses. As is often the case, it’s important for the analyst to get to work in order to understand the “how and why” behind the ratio result.   Capitalization Ratio The capitalization ratio is a key identifier of financial leverage, or operational leverage which can be broadly thought of as financial or investment risk. In general, higher results indicate higher risk; lower results equal less risk. At the same time,

Debt and Solvency Ratios Audio Debt and Solvency Ratios   Topics Introduction Debt Ratio Debt to Equity Ratio Equity Ratio Capitalization Ratio Cash Flow to Debt   Introduction Solvency is the ability of a company to meet its long-term financial obligations. This ratio group is concerned with identifying absolute and relative levels of debt, financial leverage, and capital structure. These ratios allow users to gauge the degree of inherent financial risk, as well as the potential of insolvency. Financial risk is a relative measure; the absolute amount of debt used to finance assets and operations is by itself not that meaningful. In other words, there is no right or wrong amount of debt. The company may be evaluating in context of ability to carry or service liabilities.   Debt Ratio The debt ratio is the most basic indicator of solvency which identifies the percentage of assets that are funded by liabilities. There is no set rule for the result but one could expect to see a rough range of results between 60%-80% across a broad spectrum of most industries. Financial institutions conversely are highly leveraged and ratios with results of 90%+ are common. Ratios below 50% are infrequent, with the possible exception of small family owned businesses. This ratio by itself is not especially important. It tells the level of debt or leverage, but the result needs to be considered in relation to the enterprise as a whole. High leverage can be positive if the company is able to support and take advantage of it. This ratio is therefore a starting point to solvency analysis. Analysts will quickly move on from this point by focusing attention to the composition of liabilities, earnings, cash flow, and coverage.   Debt to Equity Ratio The debt to equity ratio provides a different perspective on the manner in which a company funds its assets. It is a measure of leverage and a preliminary indicator of solvency. As with the debt ratio, there is no standard generic benchmark from which to judge all companies. This metric should be considered in large part by the industry type being analyzed while performing quality peer group analysis. Trend analysis (comparing company results over a number of years) is also helpful in understanding debt to equity ratio. Should the ratio results rise over time, for example, this trend would likely suggest increased use of bank financing or worse, signal operational issues. Such a trend would require further attention and investigation.   Equity Ratio In almost all cases, a strong equity to assets ratio is a positive sign, especially from a risk or solvency perspective. A high equity ratio is generally a common trait of quality, well performing companies. The equity ratio by itself, however, does not explain how the level of equity was achieved. A high degree of equity can be present for a variety of reasons, from seed funded startups to long-running, historically successful companies with significant retained earnings. Another possible event that could distort the usefulness of this measure could be a large secondary common stock offering. Lower relative amounts of equity can occur simply for industry-specific reasons such as the case with commercial banks or investment brokerages. This result could be also driven by an over-leveraged capital structure (too much debt) or net operating losses. As is often the case, it’s important for the analyst to get to work in order to understand the “how and why” behind the ratio result.   Capitalization Ratio The capitalization ratio is a key identifier of financial leverage, or operational leverage which can be broadly thought of as financial or investment risk. In general, higher results indicate higher risk; lower results equal less risk. At the same time,