Financial Ratio And Net Working Capital Calculations

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Quick Ratio Similar to the current ratio and net working capital calculations, the quick ratio measures a firm’s ability to pay its current liabilities with only quick assets (“Financial Ratio Analysis,” n.d.). Quick assets can be converted to cash within 90 days (“Financial Ratio Analysis,” n.d.). A stock is an example of a quick asset as it can be sold for cash when the market opens. To calculate the quick ratio, first we add cash, cash equivalents, short term investments and accounts receivables; then we divide the sum by the current liabilities (“Financial Ratio Analysis,” n.d.). In the case of the nano-brewery, the value of the numerator is $10,972.18. That value is then divided by $4,073 to give us a quick ratio of 2.69. A quick…show more content…
As a result, the debt to equity ratio is 1.45. 5 Every industry has different debt to equity standards. Generally speaking, however, a debt to equity ratio greater than one suggest that the company is more risky because it shows that creditors a have a greater stake in the company than investors (“Financial Ratio Analysis,” n.d.). Furthermore, a ratio higher than one reveals that the company’s debt levels are high and stakeholders should be alert. To lessen debt levels the nano-brewery can re-evaluate its capital structure to find the optimal debt to equity ratio. In the meantime, however, decision makers should be cautious about the company’s debt when thinking about the nano-brewery’s new strategic direction. In this case, the nano-brewery’s debt levels pose a potential threat to the company’s reservoir of liquid assets. In all, the financial ratios analyzed provide us with an overview of the nano-brewery’s financial standing. The current ratio and quick ratio tell us that the firm is capable of paying its short term obligations with current and quick assets. The positive value of the firm’s net working capital demonstrates that the company is investing in its operations. To effectively understand the value of the net working capital, however, a thorough analysis of the industry is required. Finally, the high debt to equity ratio reveals that the company has high debt levels and is mostly financed by creditors. Together, these comprehensive financial comparisons
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