Evaluating Business Stability

Paper Summary:

This paper explains that stability measures the long-term health of a business by using ratio analysis to interpret the financial position of any business; while ratios can be used to set targets and to measure performance, they are by no means foolproof. The author, as an example, defines the 'Acid Test' ratio as 'Cash and Near Cash' divided by 'Current Liabilities', which measures the ability to meet current debt and is a stringent test since it discounts the value of inventories; the rule of thumb is 1-to-1 with a lower ratio indicates illiquidity and a higher ratio may imply unused funds. The paper relates that the Sharpe Ratio, which is based on a risk-adjusted measure developed by Nobel Laureate William Sharpe, calculates using standard deviation and excess return to determine reward per unit of risk.

From the Paper:

"The P/E looks at the relationship between the stock price and the company's earnings. The P/E is the most popular metric of stock analysis. The P/E gives you an idea of what the market is willing to pay for the company's earnings. The higher the P/E the more the market is willing to pay for the company's earnings. A low P/E may indicate a "vote of no confidence" by the market or it could mean this is a sleeper that the market has overlooked. What is a desirable P/E? It all depends on the investors' willingness to pay for earnings. The more they are willing to pay in the belief that the company has good long term prospects over and above its current position, the higher the right P/E is for that particular stock."

More papers on Evaluating Business Stability:

• Term Paper # 147193 : "Doing Business in Iran"
• Research Paper # 65546 : "On-Line Banking"
• Research Paper # 51196 : "Oil Industry Maintenance"

APA Citation:

MLA Citation: