liquidating its long term assets (Fridson, 2011). This also provides insight on the business’ crude financial health and operating efficiency (Fridson, 2011). Delving in further into the business’ balance sheet, its net current assets are 322,171 which is also its working capital that can be employed for future daily operations. Not every situation with a ratio more than one is favorable because there are instances that a business is piling up inventory and cannot mobilize it (Fridson, 2011). In this case, the contracts receivable should be monitored since the business is a service company (Fridson, 2011). Contracts receivables are not yet cash inflows so it management must be cognizant in chasing up its customers. A common size analysis of the current assets reveals that the most liquid portion of the current assets, cash, accounts for 25 percent of the total. If the cash position is compared against the current liabilities excluding accounts payable, the cash position can settle 70% of the liabilities mentioned. The current ratio, however, provides only a basic view of the financial position of the business. It is worth examining the business’ cash flows in relation to the components of the equation.
The final ratio is somewhat similar to the Current Ratio as it takes into account liabilities in relation to assets. The Debt Ratio, however, is more specific as it measures the total debt in relation to the total assets of the business (Feldman, 2007). It measures how much is the business is leveraged which is also a measure of risk (Feldman, 2007). A highly leveraged business may be at risk of collapse if business operations deteriorate because its assets may not meet its debt (Fridson, 2011). This ratio also provides a view of the capital structure of the company since debt is not all negative since it can used to finance business expansion (Fridson, 2011). A business can set a debt ratio that it can tolerate and it should be monitored periodically (Fridson, 2011). Firstly, debt must be identified in the balance sheet in order to determine the ratio (Fridson, 2011). In regards to the business case study, debt is identified as “Lines of Credit”, “Current portions of notes payable” and “Long term notes payable”. A sum
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