Introduction
Evaluating the financial success and overall profitability of an organization is especially valuable for its future development. Of special concern are the financial metrics that provide an extensive overview of the current funds, allowing the company to mitigate unnecessary risks and avoid excessive debt or bankruptcy. This report presents an evaluation of liquidity and solvency ratios, as well as a cash flow assessment, to demonstrate that Innovative Technology Solutions cannot hire new workers without risking the company’s growth.
Liquidity Ratios: Considering Current Debts
All calculated liquidity ratios are presented in Table 1. The first metric to be assessed is the current ratio, a coefficient that reveals the organization’s capability to pay the current liabilities using the total assets currently available (Deo, 2016). For Innovative Technology Solutions, the current ratio is 1.18, which means that the company possesses enough cash and other assets to completely cover its obligations. Furthermore, considering that additional funds will remain after the payments, the business is financially secure.
Table 1. Calculated values for liquidity ratios.
Another vital coefficient related to liquidity is the quick ratio. This measure determines the enterprise’s capability to finance its liabilities based on the present liquid assets (Franklin et al., 2018). Considering that the majority of the total assets of Innovative Technology Solutions is stored in the inventory, its quick ratio is 0.28, and its capacity to quickly cover current liabilities is exceptionally low. Finally, the coefficient of operating cash ratio is essential to analyze to fully encompass the liquidity ratio. As the operating cash flow ratio helps ascertain whether the enterprise can completely cover the upcoming debts, it is critical to consider before planning any additional expenses (Franklin et al., 2018). Innovative Technology Solutions’ Current operating cash flow ratio is 0.53, which is lower than desired to pay the future obligations. Such a decreased number might indicate that the majority of the cash flow is supported by additional resources and not by the actual operating activities, resulting in the incapacity to cover the obligations.
Solvency Ratios and Debt Ratio: Ensuring Future Financial Health
Apart from considering short-term payments, the business should devote its attention to the long-term debts and liabilities, ensuring that enough funds are generated. All calculated solvency ratios and the debt ratio are presented in Table 2. Firstly, a significant leverage metric is the debt ratio, which is 0.84 for Innovative Technology Solutions. This coefficient suggests that the company acquires 84% of its current assets from loans, and the owner’s equity finances only 16%. Such a low percentage of the owner’s equity contribution might be dangerous in the long term, placing the company in a leveraged position.
Table 2. Calculated values for the debt ratio and solvency ratios.
Following the debt ratio, the equity ratio is a solvency metric essential for this analysis. This coefficient reveals to what extent the organization is funded by shareholder equity (Franklin et al., 2018). For Innovative Technology Solutions, the equity ratio is 0.15, which is significantly below 0.5 and demonstrates that the organization is leveraged, currently possessing more obligations than the owner’s equity. In the long term, such a proportion of funds can negatively impact the organization’s capability to pay its debts.
To ascertain how much a company is financed by credit, it is possible to use the debt to equity ratio. For Innovative Technology Solutions, this value is 5.56, which is incredibly elevated. This measure illustrates that the company relies heavily on leverage from loan enterprises and has accumulated an obligation that is 5.5 times higher than the owner’s equity. Such an increased equity ratio presents a significant risk, and it is possible that remaining in a leveraged position will considerably harm the organization in the future.
Overall Cash Flow Analysis
To completely evaluate all the factors that impact the future development of Innovative Technology Solutions, it is crucial to consider the current cash flow. It is essential to note that the majority of funds received from customers is delegated to salary payments. Considering the low values of the quick ratio, operating cash ratio, and equity ratio, as well as the increased numbers in debt ratio and debt to equity ratio, Innovative Technology Solutions’ present capital is significantly diminished. Furthermore, the company might experience complications during future expansions, as most of its funds are received from acquired credit while the owner’s equity is considerably reduced. Overall, as Innovative Technology Solutions does not generate enough cash from its operating activities to successfully cover all outstanding debts, hiring more employees might lead to new expenses, which would not be sufficiently covered. It is advised that Innovative Technology Solutions focuses on securing a better cash flow from the operating activities, changing its leveraged status to a more financially independent position.
References
Deo, P. (2016). Evaluating a Cash Flow Statement. International Journal of Business, Accounting, & Finance, 10(1), 22–42.
Franklin, M., Graybeal, P., & Cooper, D. (2018). Principles of accounting, volume 1: Financial accounting. OpenStax.