You have to consider many ratios when purchasing an insurance agency. Weighing these indicators makes sure that potential investors understand the risks involved when they commit to an acquisition deal with a prospect.
A Few Indicators to Look At
EBITDA is one of the most accurate metrics of any company’s actual performance. This indicator measures the agency’s revenues after deducting operational costs but before interest, taxes, depreciation and amortization expenses.
EBITDA is crucial because it shows the financial repercussions of the executive team’s operational decisions, which are factors within the managers’ control.
Cash Flow Coverage Ratio
The cash flow coverage ratio compares the insurers’ cash flows from operations against their total debt. It generally demonstrates the firm’s ability to repay its financial obligations using only cash generated from its business operations without its other income sources.
This metric represents an unlikely scenario in any business’ lifetime. However, it also calculates if the insurance agency’s financial health is sufficient to cover existing dues should other revenues run out.
Current Liability Coverage Ratio
This ratio compares the prospect’s operational cash flows with its current liabilities or debts it must pay off within the year. Take the company’s total current liabilities and divide the figure against the accumulated cash flows from operations.
Like the cash flow coverage ratio, this ratio determines whether the insurance agency can settle its short-term debts using operational cash flows alone.
Debt to Equity Ratio
Debt holds an important place in business finance. Every enterprise borrows money to finance its operations or investments. This ratio calculates how much of a potential insurance agency’s day-to-day activities are funded by liabilities.
The debt-to-equity ratio demonstrates the business’s reliance on financing to keep its operations going. It also illustrates how much of a risk a new owner can assume if it is put up for sale.
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