Small Business Management: Ratio of a Company

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February 28, 2020
Chapter 11
1.
2. The company’s current ratio is 1.23. The current ratio is a measure of liquidity and efficiency, and it gives a reasonable estimate of the company’s ability to pay its short-term payables using its existing assets. This is based on the premise that current assets, such as cash, marketable securities, and cash equivalents may be converted easily to money which may be used to pay currently maturing liabilities, without the need to sell long-term assets needed for the generation of revenue. In other words, the higher the current ratio, the more capable is the company in settling its current liabilities (Porter and Norton, 2010). The firm’s debt ratio, on the other hand, is 67.74%. This represents the portion of total assets that are financed by the firm’s creditors. This is computed by dividing the firm’s total liabilities over its total assets. The debt ratio is useful in the assessment of the company as it shows how leveraged the company by comparing how much of the resources are owned by the shareholders and by the creditors. This is vital for both investors and creditors in their decision-making. If the debt ratio is equal to one, it means that the company’s assets and liabilities are identical. Hence, the company is highly leveraged. A debt ratio higher than one means that the company has more liabilities than assets, so it is incredibly leveraged. It is too risky to invest in or lend money to. In case the debt ratio is less than one, it means that the firm has more assets than liabilities, so it could pay off its debts if it must. This is the least risky of the three situations mentioned (Fullwiler, 2016).
Chapter 12
1. A bank loan is one of the most common financing methods used by firms, esp...