Based on pages /76-185 in your textbook, calculate one ratio from each of the fo

Question

Based on pages /76-185 in your textbook, calculate one ratio from each of the following groups (three ratios total) for 2018 for Smart Touch Learning: . Ability to Pay Current Liabilities . Ability to Pay Long-Term Debt . Profitability o Current Ratio o Cash Ratio o Debt Ratio o Debt-to-Equity Ratio o Profit Margin Ratio o Rate of Return on Total Assets What do these results tell you? How will you use this information in planning and decision making? Refer to these comparative financial statements to help you work through this discussion.

Explanation / Answer

Computation of Ratios:

Current ratio is 1.84:1, the ideal ratio should be 2:1, so it is below standard ratio. The company should take steps to increase this ratio either by increasing current assets or decreasing current liabilities. Debt-euity ratio is 0.81:1 which shows that the capital of the company is financed more by equity and less by debt. A good debt to equity ratio is 2:1 so the company can take steps to increase the financial leverage as debt capital can be raised very quickly and this allows the company to take up expansion projects quickly. Profit margin ratio is 5.58% which is quite low. So the company should take steps to increase this ratio. This can be done either by increasing sales or decreasing cost of goods sold. Sales can be increased either by increasing the selling price per unit or by increasing the sales volume.

RATIOS FORMULA 2018 ($) Current ratio Current Assets / Current Liabilities 262,000 / 142,000 = 1.84:1 Debt to equity ratio Long term debt / stockholder's equity 289,000 / 356,000 = 0.81:1 Profit margin Ratio (Net income / Net Sales) * 100 (48,000 / 858,000) * 100 = 5.59%

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