Essay on Ratio Analysis
February 11, 2013
The relationship between two variables is defined by ratios. When dividing the dollar amount of one item on a financial statement by the amount of another item on the financial statement a financial ratio is computed. Expressing the relationship of two variables for ease of comparison and interpretation of other information is the purpose of ratio analysis. A ratio analysis computation allows a look at a particular time period in a financial statement. Ratios present a true picture of a company’s financial health, which serves as a control. In analyzing a business one would want to know if enough funds are being generated, if there is a …show more content…
When evaluating the liabilities category of a financial statement two of the ratios to use could be working capital ratio and cash ratio. Working capital ratio allows a company to manage day to day operations. This is also known as liquid assets. So by dividing the current assets by the current liabilities, this will give the working capital ratio. The 2012 current assets of the UOCMC were $74,348 and the current liabilities were $117,678. By dividing the current assets by the current liabilities, the working capital ratio of 0.631 was produced. A stable working capital ratio is between 1.2 and 2.0. The working capital ratio of less than one identifies a business that is not able to handle current liabilities and might be in trouble.
The cash ratio indicates a company’s liquidity by measuring the amount of the company’s cash, cash equivalents and invested funds over their liabilities (Loth, nd.). To continue with the figures from the UOCMC in 2012, their cash and cash equivalents of $74,348 plus invested funds of $27,033 divided by their current liabilities of $190,257 equaled a cash ratio of 0.53.
Financial Statement Category – Revenue Revenue ratios used to evaluate the revenue category are total margin and operating margin. The total margin ratio looks at all sources of revenue. If the