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3 pages/≈825 words
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3 Sources
Style:
APA
Subject:
Accounting, Finance, SPSS
Type:
Coursework
Language:
English (U.S.)
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MS Word
Date:
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Topic:

Ratio Analysis Application: Assessment of ABC Company's Financial Health

Coursework Instructions:

Module 2 - SLP
THE BALANCE SHEET
Before you start the assignment, test your understanding of concepts covered in the assignment. It is not a graded quiz, but a tool for reviewing some key points. The tool can be used multiple times.
The purpose of this SLP is to apply ratio analysis to assess the financial health of ABC Company. Use the balance sheet presented in the case during this module to compute solvency and efficiency ratios. Compute three ratios based on balance sheet accounts for which you have sufficient information.
Assume that ABC Company is a small specialty retail store.
Ratios are relevant when assessed over time or across companies. IBISWorld is a comprehensive resource containing market research and statistics, which can be used to compare ABC Company to the industry and leaders in the industry.
Below is a brief introduction to financial ratios using IBISWorld and screenshots that provide guidance for accessing IBISWorld via the Trident library.
Required
Part 1
First, choose three ratios from the background materials. ABC is a simple organization (see balance sheet in case), so pick ratios for which sufficient financial data is available. Verify that at least one of the ratios is included in the IBISWorld database.
Identify the name of the ratio, the formula, and show your computations.
Part 2
Next, respond to the following questions.
1)Comment on the purpose and information conveyed by each ratio.
2) What did you learn about ABC Company by reviewing the three ratios?
3) What is your conclusion about the solvency and efficiency of the company?
4) How successful is ABC Company relative to the industry average and leaders in the small specialty retail store industry? Write two paragraphs or more for this question. Refer to an actual ratio found in the IBISWorld database to support your conclusion.
A suggested approach to the assignment:
Step 1
Watch the brief introduction to financial ratios using IBISWorld as suggested.
Step 2
Access the IBISWorld database in the Trident library. See screenshots on this page for guidance.
Step 3
Choose three ratios from the background materials for which information is available in the ABC Company’s balance sheet. Make sure at least one of the ratios is included in the IBISWorld database.
A General Example Not Using to ABC Company data.
EFG is a business with $42,000 of current assets and $40,000 of current liabilities. Therefore, the current ratio is:
Current ratio = current assets / current liabilities
Current ratio = $42,000 / $40,000
Current ratio = 1.05 (or 1.05 to 1 or 1.05:1)
EFG’s current ratio of 1.05 may be small or large depending on the industry. For example, which factors should be considered in interpreting the ratio?
Step 4
Use data from the module 2 case balance sheet to compute ratios. Identify each ratio and show the computations.
Step 5
Analyze and interpret.
Step 6
Locate at least one of the industry ratios computed above in the IBISWorld database to make a comparison to the ABC Company.
Identify three balance sheet ratios. Use numbers from ABC’s balance sheet. Show the formula and computations.
The use of IBISWorld database is required (found in the Trident library).
Three to five sentences are sufficient to respond to questions 1 to 3 in the second part. Do not use an essay format.
The use of IBISWorld is a requirement for question 4. Refer to at least one actual ratio and write a minimum of two paragraphs
Show sources when appropriate. APA format is suggested but not required.

Coursework Sample Content Preview:

Module 2: SLP the Balance Sheet
Student Full Name
Institutional Affiliation
Course Full Title
Instructor Full Name
Due Date
Module 2: SLP the Balance Sheet
Part 1
The first ratio from the background materials that could be used to compute the financial solvency of ABC Company is the debt ratio. The debt ratio is included in the IBISWorld database and is determined by dividing the company’s total liabilities by its assets. ABC’s total liabilities amount to $136,000, while its assets amount to $292,000. The company’s debt ratio is 0.47. The second ratio from the background materials that could be used to compute the financial solvency of ABC Company is equity debt. The debt-to-equity ratio is also included in the IBISWorld database and is determined by dividing the company’s total liabilities by its equity (IBISWorld Inc., 2023). ABC’s total liabilities amount to $136,000, while its total equity is $156,000. The company’s debt-to-equity ratio is 0.87. The third ratio from the background materials that could be used to compute the financial efficiency of ABC Company is the working capital ratio. The working capital ratio, or the current ratio, is determined by dividing the company’s current assets by its current liabilities. ABC’s current assets amount to $164,000, while its current liabilities are $56,000. The company’s working capital ratio is 2.93.
Part 2
Q1.
The debt ratio is a solvency ratio that measures a company’s ability to settle its long-term obligations. It indicates a firm’s total debt as a ratio to its assets. The debt ratio is a useful indicator of whether a company is likely to default on its debts. A high debt ratio indicates that the company is highly leveraged and may have difficulty settling its obligations. A low debt ratio shows that the company is financially solvent. Similarly, the debt-to-equity ratio is a solvency ratio that shows a company’s ability to settle its long-term debts. It is a useful metric of a business’s capital structure, particularly the extent to which a company uses debt to finance its operations instead of its own funds. A high debt-to-equity ratio suggests the company is highly leveraged and at risk of defaulting on its obligations. On the other hand, a low debt-to-equity ratio indicates that a company is under-leveraged and may not be taking advantage of debt financing to grow.
Conversely, the working capital ratio or current ratio is a financial efficiency metric that indicates the ability of a company to liquefy its assets. The ratio measures a company’s versatility in dealing with ongoing operating expenses and short-term obligations (Luther, 2022). A high working capital ratio is desirable since it indicates that a company can maximize its current assets on its balance sheets to settle debts due within a year or less. On the other hand, a working capital ratio lower than the industry average means that the company is not efficiently using its assets and is at risk of fin...
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