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.
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
Accounts Payable 710
Payroll Taxes Payable 672
Payroll Taxes Payable 1382
Total Current Liabilities
Long Term Liabilities
Loan Payable 6500
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
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
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? What is your personal thoughts and why?
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