## 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?