Question

Take a look at this new companies projected balance sheet. Analyze and describe the health of the company.

	2020	2021	2022
Cash	$593,561	$674,051	$1,169,755
Accounts Receivable	$54,538	$84,079	$138,615
Inventory
Other Current Assets		$0	$0
Total Current Assets	$648,098	$758,130	$1,308,369
Long-Term Assets
Accumulated Depreciation
Total Long-Term Assets
Total Assets	$648,098	$758,130	$1,308,369
Accounts Payable	$11,437	$57,239	$88,618
Income Taxes Payable	$18,095	$5,556	$30,107
Sales Taxes Payable	$11,537	$19,403	$31,988
Short-Term Debt	$0	$0	$0
Prepaid Revenue
Total Current Liabilities	$41,069	$82,198	$150,713
Long-Term Debt	$20,000	$0	$0
Total Liabilities	$61,069	$82,198	$150,713
Paid-In Capital	$514,650	$514,650	$514,650
Retained Earnings		$72,379	$161,282
Earnings	$72,379	$88,903	$481,724
Total Owner's Equity	$587,029	$675,932	$1,157,656
Total Liabilities & Equity	$648,098	$758,130	$1,308,369

Answer 1

With the help of Financial Ratios, we can determine the health of the company:

1) Working Capital = Current Assets - Current Liabilities

For 2020, WC = 6,48,098- 41,069 = 6,07,029 $

For 2021, WC = 758130- 82198 = 6,75,932$

For 2022, WC = 1308369 - 150713 = 11,57,656$

The company has good working capital which means that the company will be able to pay the current obligations (bills, payroll, etc)

2) Current Ratio = Current Assets/ Current Liabilities

For 2020, CR = 648098/ 41069 = 15.78

For 2021, CR = 758130/ 82198 = 9.22

For 2022, CR = 1308369/ 150713 = 8.68

The current ratio, although decreasing over a period of time is quite high, which means the health of the company is okay

3) Debt to Equity Ratio = Total Liabilities / Total Shareholder's Equity

For 2020 , Debt to Equity Ratio = 61069/ 587029 = 0.10

For 2021, Debt to Equity Ratio = 82198/ 675932 = 0.12

For 2022, Debt to Equity Ratio = 150713/ 1157656 = 0.13

The Debt to Equity Ratio should always be low, so the health of the company is good. Although, the low ratio indicates that company is not taking advantage of increased profits, that is something which can be looked in to.

From these ratios, the health of the company looks good however the ratios Inventory Turnover Ratio, Receivable turnover ratio ,Payable Turnover Ratio and Asset Turnover Ratio gives a better indication of the health of the company, in this case it cannot be calculated since the value of Inventory and Net sales has not been specified directly.