⋆.𐙚 ̊ accounting [chapter two]: ratio analysis in a balance sheet

ratios

a way to compare numbers to see if a compnay is doing well

profitability ratio

show much profit the company is making

profitability ratio equation

total revenue - total expenses = net income

liquidity ratios

show how easily the company can pay short-term bills

solvency ratios

shows how easily the company can pay all debts (short and long term)

liquidity

how quickly you can turn assets into cash to pay bills

working capital

a quick check if the company can pay its bills

working capital equation

working capital = current assets - current liabilities

what does a positive working capital ratio mean?

the company might not have trouble paying soon

what does a negative working capital ratio mean?

the company might have trouble paying soon

current ratio

another method to measure short-term strength

current ratio equation

current assets/current liabilities

what does it mean when a current ratio is greater than one?

the company can usually pay its short term debts

solvency

a company’s ability to pay back all it’s debts in the long run

debt to assets ratio

a solvency ratio that shows how much the company is paid for with debt

debt to assets ratio equation

total debt/total assets

what does a higher debt to asset ratio mean?

the higher the ratio, the more the company uses debt (making it riskier)