Ratio Analysis of Financial Information

Learning Outcomes

  • Perform a ratio analysis on a financial statement

Ratio analysis can be used in a variety of ways to glean information about the financial health of a business.

Here’s a quick introduction to the types of ratios that can be calculated and the value of ratio analysis:

Ok, so 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.

Current Assets:
Cash 9550
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
Current Liabilities:
Accounts Payable 710
Payroll Taes Payable 672
Payroll Taxes Payable 1382
Total Current Liabilities
Long Term Liabilities
Loan Payable 6500
Stockholder’s Equity
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

$10,168=$11,550−$1382

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

8.36=$11,550/$1,382

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?

Learn More

There are tons of ratios out there, that depending on the company and what you are looking for, may be helpful!  Check out this great resource for ratio analysis. More ratio formulas can be found here. These ratios may come in handy, so go ahead and print out the list!

You can also check out this video showing the calculation of many liquidity and turnover ratios, or this video showing the calculation of many long-term debt paying ability, profitability, and stock market performance ratios.

What might be some other ratios you would consider for Simply Yoga from the list?

Practice Questions