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Balance Sheet Ratios, Essay Example

Pages: 1

Words: 181

Essay

Current Ratio

This is the comparison of a company’s current assets and current liabilities

Current Assets= Current assets

Current Liabilities

Comparing the two companies enables us to decide which of these companies qualifies for a loan. Good companies should have a ratio of more than one showing that they are not heavily indebted.

LL Sam’s Company

Current assets =108,500, current liabilities 30,000

Current ratio= 108,500/30,000

=3.62

Melinda Garcia Company

Current assets=19,000, current liabilities 174,000

Current Ratio= 19,000/174,000

=0.109

From the balance sheet analysis, the current ratio of LL Sam’s company is more favourable compared to Melinda Garcia Company. Similarly comparing the total capital, LL Sam’s company has a lower debt with most of its capital being financed from owner’s equity while the capital of Melinda Garcia Company is financed from payable notes.

Based on the balance sheet therefore, LL Sam’s company is better qualified for the loan.

Besides the balance sheet, one would require the profit and loss accounts to see how profitable the business is as well as the statement of cash flows.  These can assist me determine how much revenue a company generates and how much it is likely to manage the loan repayments.

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