I will discuss the relevance of balance sheet and Income statements from Investor’s point of view. The balance sheet a vital source to consider for investing in a company’ because the document indicates what the company is and what is its obligation. Assets are an important part of the balance sheet and the balance sheet can help one decide whether to invest or not to invest in a company.
Cash Conversion Cycle
The cash conversion cycle is a key gauge of the proficiency of a company’s working capital position. Besides, the Cash Conversion Cycle is consistently essential as a measurement of a company’s ability to efficiently run two of its most key liquid assets – accounts receivable and inventory. (Beginner’s Guide to Financial Statements. 2004)
Investors looking for the performance of liquid assets in a company’s balance sheet need to follow the Cash Conversion Cycle over an extensive period of time and compare it to that of its competitors. stability or decreases in the operating cycle are encouraging indications. On the other hand, variable collection times and an increase in inventory on hand are normally not constructive investment-quality indicators. However, some believe that:
The method should be used only as an approximation to the level of networking capital within a firm and is not appropriate when used for any other purpose. It is shown that the CCC is measured in “commingled” units which makes it difficult to interpret in terms of a number of days and renders it inappropriate for conversion into a dollar amount that may be used as input to financial decision making, such as determining the proper amount of loan needs at any point in time, or estimating future working capital requirements. (Walker, 1998)
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