To read and interpret financial statements, it is important to understand the following concepts:
Liquidity: This refers to a company's ability to pay its short-term debts and obligations. A company with high liquidity has a lot of cash and other assets that can be easily converted to cash, such as accounts receivable and inventory. A company with low liquidity may have difficulty paying its bills in the short term.
Solvency: This refers to a company's ability to meet its long-term financial obligations. A company with high solvency has a strong financial position, with a healthy balance between assets and liabilities. A company with low solvency may have difficulty meeting its long-term financial commitments.
Leverage: This refers to a company's use of debt to finance its operations and growth. A company with high leverage has a lot of debt relative to its equity. This can be risky because the company may have difficulty paying its debts if its profits decline. A company with low leverage has less debt and may be less risky.
Profitability: This refers to a company's ability to generate profits. A company with high profitability is generating a lot of revenue and has low expenses, resulting in high net income. A company with low profitability is generating less revenue or has high expenses, resulting in low net income.
