This website uses cookies to ensure you have the best experience. Learn more

Balance Sheet Ratios Essay

1101 words - 5 pages

Balance sheet ratios
The important ratios that arise from the Balance Sheet include working capital, liquidity, net worth, debtors turnover, return on assets and return on investment.

Working capital ratio

This ratio is also known as "the current ratio", and is one of the best-known measures of financial strength. The main question this ratio addresses is: "Does your business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets, such as stock shrinking or uncollectable debtors?"
A generally acceptable current ratio is 2:1; but whether or not a specific ratio is satisfactory, depends on the ...view middle of the document...

• Convert non-current assets into current assets.
• Increase your current assets from taking in new equity contributions.
• Put profits back into your business, rather than drawing them out by way of salaries etc.

Liquidity ratio

This ratio is also called "the quick ratio", and is known as the "acid test ratio" because it is one of the best measures of liquidity. This ratio is used to determine the solvency of your business or its ability to meet its immediate commitments. The liquid ratio is a much more exacting measure than the current ratio. By leaving out stocks and other non-cash assets, it concentrates clearly on assets that are liquid with a value that is fairly certain. It will answer the question of: "If all sales revenue should disappear, could my business meet its current obligations with the funds on hand or that can be easily accessed?" A ratio of 1:1 is considered satisfactory unless the majority of your quick assets are in debtors and there is a pattern of debtors lagging behind rather than paying their accounts on time. It is often referred to as the acid test. In calculating this ratio it is important to bring in only those current assets that are in cash or can be converted readily into cash. Similarly current liabilities brought in must only be those that need to be met quickly.
The formula for this ratio is:
Current Assets – (Stock & other non-cash assets)
Current Liabilities – (Liabilities not payable in the short-term)
= $120,000 – ($16,000 + $10,000)
$80,000 – $3,000
= $94,000
= 1.22 : 1.00
This means that there is $1.22 in cash or near cash assets to meet every $1.00 of immediate commitment.

Net worth ratio

This ratio measures the adequacy of the owner’s funds as it indicates the proportion of the total asset of the business that is owned by him or her. Net worth is calculated by subtracting all liabilities from total assets to arrive at the balance, which are the owner’s fund.
The formula for this ratio is:
Net Worth x 100 networth/total assets *100
Total Assets 1
= $120,000 x 100
$360,000 1
= 33.33%
In this case the owners have funded 33.33% of the business assets.
Debtors turnover ratio
This ratio indicates how well debtors are being...

Other assignments on Balance Sheet Ratios

Week2 Wiley Plus Essay

669 words - 3 pages liabilities and stockholders' equity | ------------------------------------------------- $10,688 | ------------------------------------------------- $9,870 | | | | | | | | | | Correct. |   |   | Complete the horizontal analysis of the balance sheet data for Nike using 2006 as a base. (If amount decreases, use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45). Round all percentages to 1

Cisco Systems Essay

2628 words - 11 pages Balance Sheet | | | Cisco Systems (CSCO) Balance Sheet | | | | | Fiscal year ends in July. USD -- millions except per share data. | 2009-07 | 2010-07 | 2011-07 | Dell 2011 | Assets | | | | | | Current assets | | | | | | | Cash | | | | | | | | Cash and cash equivalents | 5718 | 4581 | 7662 | 13913 | | | | Short-term investments | 29283 | 35280 | 36923 | 452 | | | Total cash | 35001 | 39861 | 44585

Ratio Analysis Nestle

1052 words - 5 pages , Nestlé Company 2014) ANALYSIS OF FINANCIAL RATIOS: To begin with, it is important to consider analysis of financial statements as one of key components to “measure profitability and financial conditions of a company” (Mark 2014). There are three basic financial statements consisting of: * The balance sheet: which summarize what a firm owns and owes at a given moment of time * The income statement: which reports on how much a company earned

Ratio Analysis

1729 words - 7 pages slightly increasing and resulted at 1.78 times in 2005-06. The reason for such stability can be there not investing remarkably on assets and not making any huge loan or financing from outside. If we take a closer look on the balance sheet, this assumption gets a more realistic touch. Year by year assets have gone slightly up and the liabilities as well, but proportionately assets were a littler higher than the liabilities which actually

Financial Management

627 words - 3 pages . All of the company’s sales are on account. Butter Cookies Comparative Balance Sheet (pesos in thousands) This Year Last Year Assets Current assets: Cash P 1,080 P 1,210 Accounts Receivable, net 9,000 6,500 Inventory 12,000 10,600 Prepaid expenses 600 500 Total current assets 22,680 18,810 Property and equipment: Land 9,000 9,000

Timken Case Study

631 words - 3 pages BBB or higher. These averages for each credit rating can be seen on Exhibit 6. The financial ratios we look at are: EBIT Interest coverage, EBITDA interest coverage, EBITA/Sales, and Total debt/ Capital. We took the figures from the balance sheet in Exhibit 2 to get our total debt and equity. We then found each ratios in each option: if we did nothing, if we got all debt, and if we got a mix of debt and equity. If we get all debt: our EBIT

Fin 571 Week 2 Connect Problems Assignment

1999 words - 8 pages . • current liabilities divided by current assets. 12. Which statement expresses all accounts as a percentage of total assets? • pro forma balance sheet • common-size income statement • statement of cash flows • pro forma income statement • common-size balance sheet Find FIN 571 Week 4 Connect Problems quiz answers here FIN 571 Week 4 Connect Problems 13. Ratios that measure how efficiently a firm's management uses its assets and equity to

Term Paper - Ratio Analysis. Accou

1408 words - 6 pages both income statement (i.e. period of time) and balance sheet (i.e. point in time), try to use “average” B/S figures. © 2015 Dragan Stojanovic Page | 1 RSM1320 – Financial Accounting BASIC RATIOS Ratio Basic Computation Interpretation Profitability Ratios  1. Gross Profit Margin 2. Operating Profit Margin Gross Profit Revenue Operating Income Revenue       3. Net Profit Margin (“return on

Bmw Financial Analysis

1915 words - 8 pages luxury automobiles in the high end of the automotive market. Liquidity Liquidity ratios simply show how much of current resources a company has to be able to cover currently maturing liabilities or debts (Hill). For example, does a company have enough cash on hand to pay the current payments on their equipment? These ratios then, inherently look at items on the balance sheet that are classified as current which typically means that they are

Whole Foods

826 words - 4 pages appear that WFM is in a better financial position, but that may not be the case, this will be discussed further when we compare the companies’ ratios. Costco (COST) is the final competitor to be contrasted with WFM. They are reporting a net income of $2,377,000 on the income statement, total assets at $33,440,000, total liabilities at $22,597,000, and shareholder’s equity at $10,843,000 on the balance sheet, and finally operating activities at


2443 words - 10 pages balance sheet at the cost plus post-acquisition changes in the Group's net assets, less any difference in the value. (J Sainbury 2009). Revenue Recognition: Revenue can be described as the risks and rewards of the services and the products which have been sent to buyers which are efficiently measured. Revenue is the sales of the retail outlets which do not include Value Added Tax. (J Sainbury 2009). Fixed Assets and Depreciation: The fixed assets

Similar Documents

Ratio Analysis In Decision Making For Health Care Organization

845 words - 4 pages account and examined properly. Using ratio analysis can help determine the financial health of an organization. It is important that everything on the financial statement remain balanced. By using ratios an organization can compare two different areas to determine the strengths and weaknesses of the organization financially. An organization should be able to look at a balance sheet at any given time and establish a financial picture that can help

Fnc 1 Study Questions Essay

1002 words - 5 pages Sheet vi. “Statement of financial position” vii. Lists all Assets, liabilities, and owns viii. As of a specific date + d. Statement of cash flows ix. Cash receipts and cash payments 2. Describe how changes to a company’s revenue and expenses affect their Income Statement and Balance Sheet. Revenues & Expenses on the income statement affect the Net Income, by increase whith revenue and

Econ 550 Essay

400 words - 2 pages flow | 8 | 27.5 | Market/Book | 1.3 | 1.1 | 1. What is the free cash flow for 2013? 2. Suppose Congress changed the tax laws so that Berndt’s depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? 3. Calculate the 2013 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity

Puppy Essay

353 words - 2 pages trial balance. Chapter 3: Balance Sheet – uses and limitations; Classification – Asset (current vs. non current), Liab. (current vs. noncurrent), Stockholders’ equity, should know how to prepare a classified balance sheet; Disclosure notes; managements’ responsibility – responsibility for fairness of financial statements and responsibility for reporting on internal controls; auditor’s report - report and opinion on fairness of financial