Financial analysis requires a great deal of interest and patience in money matters. This as well as discipline is the key determinant that separates the average earner from the billionaire. Sustainable income is then described as the ordinary or usual transactions that take place every financial year. However, it does not include loss of income from shutting down a department or arm of a government. According to Weygandt et al. (2009), income from sale of a segment of the business or disposing of that arm's infrastructure is also not considered sustainable income. Basically, quality of earnings is one of the ways to determine a company's financial health. Business managers may sometimes manipulate this so as to present their company in a good light. Sustainable income and quality of earnings are two key factors that investors consider before signing up.
Weygandt et al. (2009) further states that horizontal and vertical analysis are some of the tools used to compare and contrast sustainable income and quality of earnings. The company's records are compared each year to trace progress or retrogression. The company is also compared to other company's who operate similar businesses. The final comparison is done to determine where the company stands when compared to the average industry earnings.
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Ratio analysis is the final light that projects the big picture. A high price earning ratio signals investor confidence in the company's financial future. On the other hand, liquidity ratios show how fast a company can raise money to offset bills or handle emergencies. This is an indicator of the ability to handle crisis and ease of access to financiers. Solvency ratios demonstrate a company's consistency in meeting long term obligations. Stock holders as well as long term creditors use this as a benchmark. Finally, the profitability ratios measure income versus operational costs. This is the final indicator of financial health.
References
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Accounting: Tools for Business Decision Making . John Wiley.
