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14.12: Ratio Analysis of Financial Information

  • Page ID
    45999
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    Learning Outcomes

    • Perform a ratio analysis on a financial statement

    Ratio analysis can be used in a variety of ways to glean information about the financial health of a business.

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    Ok, so ratios are another amazing way to notice variances in assets, liabilities, income and expenses. There are tons of different ratios we could look at but let’s take a couple and examine them for Simply Yoga.  Take a look at their balance sheet.

    Current Assets:
    Cash 9550
    Accounts Receivable 900
    Prepaid Expenses 1100
    Total Current Assets 11550
    Property and Equipment:
    Yoga Props (less accum depr) 1500
    Total property and Equip. 1500
    Total Assets 13050
    Current Liabilities:
    Accounts Payable 710
    Payroll Taes Payable 672
    Payroll Taxes Payable 1382
    Total Current Liabilities
    Long Term Liabilities
    Loan Payable 6500
    Stockholder’s Equity
    Common Stock 1000
    Retained Earnings 4186
    Total Equity 5168
    Total Liabilities 13050

    Let’s talk first about the working capital ratio. The formula is:

    Working capital= current assets−current liabilities

    $10,168=$11,550−$1382

    So, this shows that Simply Yoga has plenty of funds to pay current liabilities, which is a good thing! But, it also shows that they are holding more funds in a very liquid account, which may be better used to pay off any higher interest debt, such as their loan payable. This is an area for review, right?

    The current ratio is another way to look at the ability of a company to cover short term debt.

    Current Ratio = Current assets/Current Liabilities

    8.36=$11,550/$1,382

    What this tells us is that Simply Yoga has enough current assets to cover their current liabilities 8.36 times. Again, this is a good thing, unless they are paying a crazy amount of interest somewhere else. Might that cash be better used to pay off that loan they have sitting on the books?

    Learn More

    There are tons of ratios out there, that depending on the company and what you are looking for, may be helpful!  Check out this great resource for ratio analysisMore ratio formulas can be found here. These ratios may come in handy, so go ahead and print out the list!

    What might be some other ratios you would consider for Simply Yoga from the list?

    CC licensed content, Original
    • Ratio Analysis of Financial Information. Authored by: Freedom Learning Group. Provided by: Lumen Learning. License: CC BY: Attribution
    All rights reserved content
    • Module 12, Video 5- Ratio Analysis. Authored by: Tony Bell. Located at: https://youtu.be/gW8SydkjLAw. License: All Rights Reserved. License Terms: Standard YouTube License
    • Module 12, Video 4-Ratio Analysis. Authored by: Tony Bell. Located at: https://youtu.be/vSlNyRkdU08. License: All Rights Reserved. License Terms: Standard YouTube License

    14.12: Ratio Analysis of Financial Information is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts.

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