The Daily Technical #102: What are some of the most common margins used to measure profitability?

Good morning. Welcome to the 102nd edition of The Daily Technical.

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OVERVIEW OF YESTERDAY’S QUESTION
What is restricted cash and could you give an example?

Restricted cash is cash reserved for a specific purpose and not available for the company to use.

On the balance sheet, the restricted cash will be listed separated from the unrestricted cash, and there'll be an accompanying disclosure providing the reasoning why this cash cannot be used.

An example of restricted cash would be if a company signed an agreement to receive a line of credit, but the lender has required the borrower to maintain 10% of the total loan amount at all times (i.e., “bank loan requirement”). As long as the line of credit is active, the 10% minimum must be preserved to avoid breaching the lending terms.

The company may have a separate bank account to hold the funds, or the lender may have required the amount to be placed in escrow to ensure compliance.

Common Mistakes

1. Forgetting to mention how restricted cash appears separately from unrestricted cash on the balance sheet. Emphasize this distinction as it highlights the cash's limited availability.

2. Forgetting that companies must disclose the reasons behind the restrictions on cash usage. Always include this detail, as it provides transparency and informs stakeholders of the financial obligations tying up the cash.

TL;DR

• Restricted cash is reserved for specific purposes and not for general use.

• Appears separately from unrestricted cash on the balance sheet with an explanatory disclosure.

TODAY’S QUESTION
What are some of the most common margins used to measure profitability?

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