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Balance sheet provides a view of the health and stability of the business. It lay down an image of what the business owns (its assets) and what it owes (its liabilities). For lending loan to businesses, it is very important to make financial ratios as a part of loan agreement. It is required to keep certain percentage of equity above the debt of the business or current assets should be above a particular percentage of the current liabilities of the business (Casu et al., 2005).
The given balance sheet of the business lay down that the current asset of the business is 1598 (in thousands) in FY 2015 which is more than the current liabilities which is 1547 (in thousands). The net worth of the business is calculated by subtracting total liabilities from total assets which is 509 (in thousands). This is a fundamental metric to gauge the financial health of a business.
The given income statement of the business shows that the net profit after tax is equivalent to 105 (in thousands). This shows that the business performed well through its core operations. This is a measure to portray the operating efficiency of a company.
One of the fundamental ways to identify the financial health or credit worthiness of the firm is to look closely at the financial ratios of the firm. These financial ratios provide basic information about the amount of debt, quantity of inventory, or the duration of collecting receivables. With the help of financial ratios it is easy to compare between different aspects of the performance of a business (Chen, 1981).
In the balance sheet, the current assets of FY 2015 is equivalent to 1598 (in thousands), and the current liabilities is equal to 1547 (in thousands). Thus, the current ratio would be 1.033. The current ratio is close to 1, which means the company could easily function. However, the business deals with heavy assets and work in progress inventory, therefore, a higher current ratio is preferred to cover the short term liabilities.
Barnes, P. (1987). The analysis and use of financial ratios: A review article. Journal of Business Finance & Accounting, 14(4), 449-461.
Beaver, W. H. (1966). Financial ratios as predictors of failure. Journal of accounting research, 71-111.
Chen, K. H., & Shimerda, T. A. (1981). An empirical analysis of useful financial ratios. Financial management, 51-60.
Casu, B., & Girardone, C. (2005). An analysis of the relevance of off-balance sheet items in explaining productivity change in European banking. Applied Financial Economics, 15(15), 1053-1061.
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