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• Published : April 28, 2012

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Illustrate the financial state of a given business using ratios

I have been asked to illustrate the financial state of a given business using ratios, to do this I will use accounting ratios to show the financial state of Porcella. One of the ways a business can measure how it is doing is through ratio analysis. Ratios can help Porcella to see how it is doing now and how it compares to last year or the year before and against competitors. For these ratios to be useful, they should be compared over time to see if there are any trends and also compared between businesses within the same industry (competitors). I shall be using the following ratios Solvency Ratios, Acid Test Ratios, Profitability Ratios, Net profit Ratios, Efficiency Ratios, to illustrate the financial state of Porcella.

Solvency
Businesses can use ratios to work out their solvency by using the current ratio and acid test ratio. These ratios allow businesses and potential investors to see how well they are able to meet their liabilities. A business is considered to be solvent when it can pay its debts as they become due. In day-to-day terms, this means it can pay its suppliers by having enough working capital. There are two key ratios that help the business determine whether their business is showing a solvent position. Current ratio: this ratio shows how many assets a business has compared to liabilities; it shows how easily it would be to pay its creditors the current ratio looks at the relationship between current assets and current liabilities. These figures are always shown on the balance sheet and the ratio is calculated as follows:

Current ratio = current assets ÷ current liabilities
For e.g. the current ratio for the balance sheet is,

C.R=C.A/C>L
= 10,600/3600
=2.94= 3

If the figure is just over 1, then the business may be in a difficult position for payment, as it is considered good practise to have a figure between 1.5 and 2, so that the business can be sure it...