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Essay example - Assignment: Understanding the Concepts

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Finance & Accounting
Pages 4 (1004 words)
Understanding the Concepts in Finance and Accounting Name: Institution: Course: Tutor: Date: Imagine you are a small business owner. Thoroughly determine the financial ratios that are important to the business. Compare your ratios with those that are important to a manager of a larger corporation…

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Solvency ratios help small business owners to determine ability of their business to pay long term liabilities (New South Wales Government, 2012). Debt ratios help compare the total liabilities to the total assets. Debt Ratio= Total Liabilities ? Total Assets For example if total liabilities=$150, 000, while total assets=$300,000 Therefore, Debt ratio=150,000? $300,000= 0.5 On the other hand, profitability ratios help small business owners to determine ability of their business to generate earnings based on the expenses incurred (New South Wales Government, 2012). Some of the profitability ratios include; Net profit margin and return on assets. Net profit margin may be determined as follows. Net Profit Margin= Earnings before income and tax (EBIT) ? Sales while on the other hand, Return On Assets= Earnings before income and tax EBIT) ? Total Assets. For example if EBIT=$800,000, Sales=$1,000,000 while total assets=$300,000 Return on Assets=800,000?$1,000,000=0.8 Return On Assets=$800,000?$300,000=2.6666 Connectively, liquidity ratios are important tools used by small business owners to determine the ability of their business to pay the outstanding debts (Charantimath, 2006). ...
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