Ratios are used by organizations to compare financial information and performance. Ratio comparisons can be used to compare the financial performance of time periods within the same organization or to compare the performance of different organizations. Ratios are also used to evaluate the financial health of an organization. For example lenders will use financial ratios to determine the organization’s willingness to loan Tootsie Roll Industries, Inc. money. Common ratio categories used include liquidity, solvency, and profitability. By conducting the ratios evaluations the organization can determine the financial health of the organization (Kimmel, Weygandt, & Kieso, 2009). Liquidity
Liquidity ratios are an indication of the organization ability to pay back debts owed within a year or operating cycle. Because this ratio determines the organization’s ability to pay, liquidity ratios, including the current ratio use the only assets that can be liquidated quickly. In the case of Tootsie Roll Industries, Inc. Industries the organizations working capital in 2007 is $141,757 versus $128,706 in 2006. Working capital is an indication of the capital that is available to pay short-term debts. To calculate working capital, current liabilities are subtracted from current assets. The increase in working capital indicates that the organization would have funds to pay off current debt and the 10% increase associated with the loan. Another important liquidity ratio is the current ratio. The current ratio is calculated by dividing current assets by current liabilities. The current ratio for 2007 is 3.45 to 1. The current ratio for 2006 was 3.069 to 1. The current ratios indicate that the organization has increased assets to debt ratio and currently has $3.45 of assets per every dollar of debt. The current ratio indicates that the organization is in a position to take on additional debt. Based on the liquidity ratios Tootsie Roll Industries, Inc. has sustained performance needed to pay current debts and could increase organization debt (Kimmel, Weygandt, & Kieso, 2009). Solvency
Solvency ratios are used to determine an organizations ability to pay interest on loans and ability to pay back a loan over a sustained period of time. One solvency ratio is the debt to total assets ratios. The debt to total assets ratio is determined by diving the organizations liabilities $258,277 by the organization’s total assets $812,725. Tootsie Roll Industries, Inc., Industries has a debt to total assets ratio of 32% for 2007. The 2007 percentage is a 12 percent increase from the previous year and indicates a decrease in the organization ability to meet interest and debt payments. A 10% increase in debt would further increase this percentage, however; it appears the organizations will be able to meet debt payment Obligations (Kimmel, Weygandt, & Kieso, 2009).
The previous two ratios were indicators of the organization ability to pay back organization debt. Profitability ratios are indicator of the organizations financial...