Company's Current Ratio example essay topic

To determine Panorama's financial positions, we need to use ratio analysis. There are four main categories we can use. They are liquidity, activity, profitability, and debt or financial leverage. The first category Panorama needs to look at is liquidity. This is measured in three different ways. Working capital, current ratio and the acid-test ratio.

Working capital can be described as a company's current assets minus its current liabilities. Panorama's working capital would be $833.89. The second is the current ratio in which we would find by taking a company's assets divided by its current liabilities. In this case Panorama had current assets of $1808.89 and current liabilities of $975.00. A company's current ratio is very important in determining its bill paying capacities. The third category, the acid-test ratio, is a good method to determine if a company will be able to meet their short-term financial obligations.

Acid-test ratio is found by taking the company's current assets minus inventories and dividing that by their current liabilities. Panorama had an acid-test ratio of 1.3, which indicates that it is a company with adequate liquidity. One thing to keep in mind when measuring liquidity would be to know what method of cost flow assumption was used, FIFO or LIFO. This would have an affect on the working capital and the current ratio so we will need to know this when comparing to other companies.

Activity measures are the other measures used in ration analysis. Turnover is used to determine the amount of sales generated from the average assets a company has. Two methods that would affect the asset turnover would be depreciation methods and the cost-flow assumptions. The higher the turnover, the better the company. Profitability measures are used to determine return on investment and the return on equity. Price / Earnings ratio is another way to measure a company's profitability by dividing the market price of a common share of stock by the earnings per share.

The P / E ratio tells us the value of a company's common stock. Dividend pawed ratio and the dividend yield are some other ways to judge a company's profitability. Debt, or financial leverage is the last category of ratio analysis used to find the financial condition of a company. Debt, or financial leverage is the last category of ration analysis used to find the financial condition of a company. Leverage adds risk to the operation of a company because a highly leveraged company would be at a greater risk for bankruptcy than a company that was not. Debt and preferred stock provided good leverage for a company because the interest rate is at a fixed rate.

There are two financial leverage measures used to tell whether a company is using financial leverage. Debt ratio is the total liabilities to the total of liabilities and owners equity whereas the debt / equity ratio is the ratio of total liabilities to total owner's equity. Both of these measures are the same concept but just stated in a different manner. In conclusion, from looking at Panorama's financial statement and using some of the ratio analysis formulas, the company's outlook seems pretty positive.

For example, their working capital is positive which shows good financial strength for the company. Also, another strength Panorama shows is they had an acid-test ratio that shows that short-term they show adequate equity. Weaknesses for the company might be that their liabilities are growing and maybe some of their expenses are rising but overall Panorama appears to be a financially stable company.