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Balance Sheet Ratios, Essay Example
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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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