A financial manager can look at different ratios and financial statements to determine if the business is successful or in distress. However, there are some key indicators that can provide an adequate and quick assessment of the business’s financial health. Mcclure (2019) suggests that examining financial statements is the best approach to detecting risks early. For example, cash flow statements are valuable sources of information since they indicate the business’s ability to finance its operations (Brigham & Ehrhardt, 2017).
Over the long term, low cash flow can be a serious sign of issues in the internal environment of the firm. Next, the debt to equity ratio is important because it displays the risks that the company has concerning its debt (Twin, 2019). Although many factors can lead to negative cash flows, for example, a delay between the spending and collection of receivables may affect the cash flow, it is necessary to address such problems and ensure that the business has the cash to operate further.
Working capital, which are businesses’ assets subtracted from their liabilities, can also be a good indicator of success or failure. This metric displays the operational funds available to managers and can provide insight into the convertibility of these assets if necessary. Another success indicator is the current ratio, which displays the firm’s ability to repay its liabilities (Twin, 2019). Example of success in today’s business world is a good return on equity (ROE) ratio. This metric shows the company’s income contrasted with shareholder’s equity. As such, this ratio can provide insight into whether the company is earning enough money, based on its size, which is an important success indicator. ROE also signifies that the business adequately uses its financial resources to grow.
Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory and practice (15th ed.). Mason, OH: South-Western.
McClure, B. (2019). Financial ratios to spot companies in financial distress. Web.
Twin, A. (2019). Key performance indicators (KPIs). Web.