Ratio Analysis
Ratio Analysis
Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.
Liquidity ratios
Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs.
Current ratio. The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities. | | | | |
| 20X1 | 20X0 | Current assets | $38,366 | $38,294 | Current liabilities | 27,945 | 30,347 | Current ratio | 1.4 : 1 | 1.3 : 1 | |
This ratio indicates the company has more current assets than current liabilities. Different industries have different levels of expected liquidity. Whether the ratio is considered adequate coverage depends on the type of business, the components of its current assets, and the ability of the company to generate cash from its receivables and by selling inventory.
Acid-test ratio. The acid-test ratio is also called the quick ratio. Quick assets are defined as cash, marketable (or short-term) securities, and accounts receivable and notes receivable, net of the allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain cash from the assets) and therefore, available for immediate use to pay obligations. The acid-test ratio is calculated by dividing quick assets by current liabilities. | | | | |
| 20X1 | 20X0 | Cash | $6,950 | $6,330 | Accounts receivable, net | 18,567 | 19,230 | Quick Assets | $25,517 | $25,560 | Current
Ratio analysis is used to evaluate relationships among financial statement items. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency.
Liquidity ratios
Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs.
Current ratio. The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities. | | | | |
| 20X1 | 20X0 | Current assets | $38,366 | $38,294 | Current liabilities | 27,945 | 30,347 | Current ratio | 1.4 : 1 | 1.3 : 1 | |
This ratio indicates the company has more current assets than current liabilities. Different industries have different levels of expected liquidity. Whether the ratio is considered adequate coverage depends on the type of business, the components of its current assets, and the ability of the company to generate cash from its receivables and by selling inventory.
Acid-test ratio. The acid-test ratio is also called the quick ratio. Quick assets are defined as cash, marketable (or short-term) securities, and accounts receivable and notes receivable, net of the allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain cash from the assets) and therefore, available for immediate use to pay obligations. The acid-test ratio is calculated by dividing quick assets by current liabilities. | | | | |
| 20X1 | 20X0 | Cash | $6,950 | $6,330 | Accounts receivable, net | 18,567 | 19,230 | Quick Assets | $25,517 | $25,560 | Current