A Healthy Company

Health, to a layman, according to the World Health Organization, is “a state of complete physical, mental and social well-being”. You might ask, how does this apply to a company? Well, Let’s take a quick look…

At year-end, companies, especially those quoted on the stock exchange. After their accounts have been audited and published to the general public, declare a particular amount as their year-end profit or as the case may be, a loss.

While growing up, I was always excited about the final profit figure and always used the profit figure as a judge of the company’s true worth. However, I later came to the reality that this is not always the case. A good example will be the company considered by many as the oldest travel agency in the world, Thomas cook. In 2019, Thomas cook filled for liquidation and shutdown of its operations with immediate effect. This was a news that shocked the entire world. The shutdown left so many travelers stranded in different parts of the world. An interesting fact was that Thomas cook recorded over £9.6 billion in revenues in the financial year prior to their shutdown. They also posted about £19.4 million profit in September 2019, the year and month when the company shutdown.

How could a “profit-making company shut down its operations?”

Firstly, Profits or earnings along, is not a good yardstick for measuring company’s performance. There are some number of Yardsticks used in measuring company’s performance, but I will highlight a few of them.

• Cash: It can also be regarded as the organization’s liquidity. Some say ‘cash is king’. This is true in every business, a company that posts consistent profits year-in and year-out but maintains a little cash balance will definitely run into trouble. It is only a matter of time.  Cash, and you could include cash equivalents is what companies use to run their day-to-day operations. It can also be known as working capital. It can best be represented in the quick ratio analysis. Every business needs cash to fund its daily operations, a business that finds it difficult to fund its operations might be forced to borrow funds, which comes with a finance cost, one that would require constant repayments and might come with some debt-covenants as well. A healthy business first of all, is a liquid business.
• Debt-to-Equity: Debt of a company is generally regarded as the financial risk of the company. Asides from the general business risk the company faces, which is not peculiar to the company but also common in the industry it operates. It will also face financial risk when debt is introduced as part of its capital. Although by financial analysts, debt is considered to be a cheaper source of finance, it is however considered to carry more risk, this will become more pronounced when the company begins borrowing more than its current capacity or industry average. A healthy company should have both debt and equity capital mix in a way that will bring an optimum benefit to the company.