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Liquidity (solvency),debt service, andprofitability.Comment on the ratios by answering the following questions. Go to IBIS, locate a U.S. specialty industry report, which you feel is appropriate for t
- Liquidity (solvency),
- debt service, and
- profitability.
Comment on the ratios by answering the following questions. Go to IBIS, locate a U.S. specialty industry report, which you feel is appropriate for the company you are analyzing. Use the statistics tab to view the ratios.
- Name the company and show the computation of the three ratios.
- Comment on the purpose and information conveyed by each ratio.
- What did you learn about the company by reviewing the three ratios?
- What is your conclusion about liquidity, debt, and profitability for this company?
- How successful is the company relative to the industry average and leaders in its industry? Indicate the industry and specialty industry report used for comparison. Write two paragraphs or more. Include ratios found in the IBIS database to support your conclusion
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- ANSWER
Accounting
Name:
Institutional Affiliation:
Date
Liquidity, Debt Service and Profitability Ratios
Zoom Video Communication is a company offering video and communication services
including chat, video and online conferences as well as mobile chats. The technological field has
companies related to conducting research. It also develops and distributes technology products
and services as software creation, selling of computers and electronics as well as information
based on technology. These unique companies carry little to no inventory and at times they might
not be able to make revenue. They instead usually take on large capital investments or issue huge
amounts to fund research and growth. Using this company we will look at financial ratios as
liquidity ratio, debt service, and profitability in the technology industry.
Liquidity ratio gives insight into the company’s potential to meet its short-term financial
goals. To calculate and analyze the ratio: Current ratio = (Current assets ÷ current liabilities),
which is the most used liquidity ratio on a company’s ability to pay its dues on a short term (Cai,
2011). This means that the company must have a high current ratio for meeting all costs on
operations. As for cash ratio, it is the most traditional of liquidity ratios making it the hardest to
discern. To calculate this: Cash ratio = ((Marketable securities + cash) ÷ current liabilities).
The financial leverage ratio also called the debt service ratio, monitors the long-term
objective at a company's achievement. This type of ratio considers the long term bets and
investments, all which hugely impact the companies in the technology field. To calculate this:
debt-to-equity ratio = (total debt) ÷ (total equity). The importance of this ratio is to carry out
analysis on the company as they take on large sums in investments and debt and fund tech
company research and development (Ari, 2009).
Profitability ratio is another form of the financial ratio are a good indicator of future
profitability as it is not assured that there will be profits made and it is also important to look at
the margins of these companies as gross profit margin. It is calculated: Gross Profit Margin =
(sales – the cost of the goods sold) ÷ sales. This measures the profits earned from sales but only
applicable if the company is making sales. Therefore a high gross profit margin translates into a
profitable company.
In the liquidity ratio, the current ratio translates to 14 million which can be changed to
cash within a specified period so as to pay a debt. This means the higher the figures, the less the
risk, the better for the company. Profitability ratios, on the other hand, prove that the company is
good at making money (Hull, 1999). This also means that the higher the sales, the better the
ratio. In leverage debt, we see how the debt the company took is being used and is serving the
business. Translated to debt ratio, it shows how much of the company is running on debt. And
for a company to be safe the ratio should be low which in this case is $27 million.
Zoom Video Communication is doing well compared to last year’s report. The company
has more assets than it has debt which is a good thing for the company, and as with their
operating cash, they seem to have come close having a low debt which again is better for the
company. The three ratios discussed are simple and there are many others that have got different
uses, and the disadvantages of using them.
In conclusion, the company seems to be performing okay using the financial data
provided. They are profitable compared to other tech companies and are able to stay solvent as
well as in using its assets and maximizing on its debt.
Works Cited
Ari, Y. (2009). Debt to Equity Ratio, Degree of Operating Leverage, Stock Beta and Stock
Returns of Foods and Beverages Companies on the Indonesian Stock Exchange, Journal of
Applied Finance and Accounting. 2 (2), pp. 1-13
Cai, Z. (2011). Leverage Change, Debt Overhang, and Stock Prices, Journal of Corporate
Finance, 17, pp. 391–402.
Hull, M. (1999). Leverage Ratios, Industry Norms, and Stock Price Reaction: an empirical
investigation of stock-for-debt transactions. 28 (2), pp. 32-4