Introduction
A balance sheet is an important document that might be described as a current report of a company’s financial and economic status (The Kaplan Group, 2013). Balance sheets summarize the information about what organizations own and their debts (The Kaplan Group, 2013). The data provides investors with the basis for an analysis of the financial soundness of an organization. Thus, they get a chance to make the right choice about whether to invest in the business or not. The purpose of this paper is to analyze the balance sheet of Best Care Health Maintenance Organization as of June 30, 2011, and to calculate the company’s working capital and debt ratio.
Defining Best Care’s Liquidity and Financial Strenght
The first area of importance is Best Care Health Maintenance Organization’s liquidity. It shows if the company can easily pay for its expenses from its assets. To estimate the organization’s liquidity, it is necessary to look at its ratio (The Kaplan Group, 2013). The current ratio, or networking capital ratio, which is one of the major measures of liquidity, is calculated by dividing current assets by current liabilities (The Kaplan Group, 2013). According to the balance sheet under analysis, the current assets of Best Care amount to $ 3,945,000, and the current liabilities make $ 3,456,000; hence, the organization’s working capital ratio is 1.14. In fact, the current ratio of 2.0 or higher indicates a sufficient level of liquidity. Therefore, it might be stated that Best Care’s figure of liquidity is not satisfactory.
The second factor to take into consideration while analyzing the balance sheet is the organization’s financial strength. To define whether Best Care is a financially strong company or not, it is necessary to calculate its debt-to-equity ratios. In spite of the fact that in some spheres, it is normal for companies to have debts that are higher than equity by several times, in general, a different rule applies (The Kaplan Group, 2013).
In short, it might be formulated as the smaller the debt the stronger the company. The long-term debt of Best Care is $4,295,000 and its equity amounts to $2,118,000. Therefore, the long-term debt ratio is calculated by dividing 4,295,000 by 2,118,000 and makes 2.027. Another significant ratio here is total debt to equity; in the case of Best Care, it amounts to 3.65 which is the result of dividing $7,751,000 of total liabilities by $2,118,000 of equity. In fact, both ratios are higher than 1.0; hence, the company does not look strong and solid from the financial point of view.
Calculating Best Care’s Debt Ratio and Working Capital
Other important markers of Best Care’s financial state include debt ratio and working capital. It is possible to note that the “debt ratio shows how much a company relies on external resources to finance its assets” (OfficeToDo, 2014). To calculate the number for Best Care one should divide liabilities with assets: $3,456,000/$3,945,000 = 0.87. In fact, the result is a bit higher than normal figures of 0.6 – 0.7 which means that Best Care is dependent on external resources to a high extent. As for working capital, it shows the business’s ability to pay its debts using the financial resources it has at the moment (eHow, 2009). The formula for calculating the figure is current assets minus current liabilities: $3,945,000 – $3,456,000 = $489,000 (eHow, 2009). The number is quite good because it indicates that the company is able to pay its liabilities.
To sum up, a balance sheet is a report of a company’s current financial status which can be useful for analyzing its economic soundness. Speaking about the organization under analysis, Best Care, its financial strength and liquidity might be not satisfactory. The figures for working capital and debt ratio amount to $489,000 and 0.87 respectively. The first number is normal and means that Best Care can cover its debts; the second one is over the norm. Therefore, all in all, the business might not be regarded as stable and strong.
References
eHow. (2009). Business calculations & accounting: Calculating working capital [Video]. Youtube. Web.
OfficeToDo. (2014). Calculating debt ratio in Excel [Video]. Youtube. Web.
The Kaplan Group. (2013). Balance sheet analysis − Beginners guide [Video]. Youtube. Web.