Numbers. I am not a fan. I can work with them, I just don’t love them. The right side of my brain is definitely in charge no matter what area I am working in. That being said, I recognize that numbers are important – especially when you are trying to make sense of finances, balance the budget at work, and perhaps invest in properties.
A big part of understanding company finances relies on your ability to use ratios to quickly asses the financial health of an organization.
WHAT IS THE DIFFERENCE BETWEEN THE RIGHT AND LEFT SIDE OF THE BRAIN?
The left hemisphere is in charge of carrying out logic and exact mathematical computations. The right hemisphere is mainly in charge of spatial abilities, face recognition and processing music.
According to Investopedia, “ratio analysis isn’t just comparing different numbers from the balancesheet, income statement and cash flow statement. It’s comparing the number against previous years, other companies, the industry or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and how it might perform in the future.”
Examining The Quick Ratio (also known as the Acid Test Ratio):
EXPLANATION: It’s a liquidity ratio that measures the ability of a company to pay immediate liabilities using near cash or quick assets. These are assets that can convert to cash within 90 days or in the short-term.
FORMULA: Quick Ratio = Cash + Cash Equivalents + Short Term Investments + Current Receivables / Current Liabilities
ANALYSIS: This ratio measures the ability of a company to pay off its current liabilities without needing to sell off any long-term or capital assets. If a company finds itself needing to sell off its long-term assets, this can signal to investors that the current operations aren’t making enough profit to pay off immediate liabilities. Higher ratios are more favourable as they show there are more quick assets than current liabilities.
I sat down with some of REIC’s long standing CRF members about their experience in the world of real estate finance.
How has real estate finance changed since you started in the business?
“The world of real estate finance has changed as the world around us has changed. The creation of REITs and structured finance products combined with regulatory changes, environmental awareness and advancing technology has created a more dynamic, complex yet interesting environment.”
“The fundamentals haven’t really changed at all, other than increased vigilance of borrowers, their net worth and capacity to withstand a downturn. The standard checks and balances of the value of a property are still the same. Tolerances of buoyant or depressed markets do change with changes to the economy.”
In your opinion, what is the top skill someone getting into the industry needs to have in order to succeed?
“The fundamental and most critical skill is the ability to analyze all of the components leading to making a recommendation, to proceed or stop, and the spine to defend their position.”
“Much of the heavy lifting in real estate finance is now done by computers. The top skill needed for success goes beyond being able to navigate the technology and get an output. It’s the ability use logic and reason to interpret the data and the outputs, and know what questions to ask to ensure sound judgement is being applied.”
If you could use only one financial ratio: which one would it be, and why?
“The most important financial ratio depends on the product potentially being purchased, financed or refinanced. It all depends on your perspective. Are you the buyer, the purchaser, the lender, the insurer? An underwriter of a mortgage puts most of their trust in the DCR and you vary your parameters to assess value using current, projected or worst case numbers.”
“There isn’t just one ratio that can ever tell the whole story. I’d ask more questions if only presented with one piece of the financial puzzle.”
If you are pursuing a career in real estate finance, you will need fiscal planning skills and the knowledge to calculate important financial components. Take control of your property’s financial outlook and broaden your perspective with advanced real estate education. If you would like to know more about this program, and REIC’s flexible course options, please contact us today.