BestCare Health Maintenance Organization (HMO) Net Working Capital Totals current assets- total current liabilities $3,945,000-$3,456,000=$489,000 BestCare Health Maintenance Organization (HMO) Debt ratio Total debt (liabilities) / total assets $7,751/$9,869=0.79=79% Balance sheet lists assets, liabilities and owner’s equity. The assets listed on the balance sheet are acquired either by debt (liabilities) or equity. “Companies that use more debt than equity to finance assets have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and/or an aggressive capital structure can also lead …show more content…
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
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A company's current ratio measures its ability to pay its current debts, defined as those due within one year. It does so by comparing the company's current liabilities with its current assets, meaning those that can be converted to cash within a year or less.
Liquidty Ratios are used to judge short term solvency of the company as if it have sufficient working capital to pay off its short term obligation. Generally two measures of Liquidity Ratios are used by analyst to adjudge the liquidity position of the company:
BestMed Medical Supplies Corporation is looking for an alternative communication tool in which all 500 employees have a way to communicate more efficiently. Having a unified communication system could greatly improve their company. Examples could include customer relations, inventory, and scheduling. Currently the team is using instant messenger, emails, texts and call on their person cell phones.
The working capital of the company can be simply calculated by deducting current liabilities from current assets. Working capital management is very important in a company as it guarantees the ability of the firm to carry on its operations and to pay its short term debt and operation expenses.
...To check how successful it has been, we calculate debtor collection period ratio. (Dyson, 2004) Fixed Asset turnover: In this ratio, we seek the amount of sales that can be generated (or the amount of fixed assets necessary to achieve a level of sales) from a given level of fixed assets. (Klein, 1998) Total asset turnover: This ratio determines that how efficiently a firm is utilizing its assets. If the asset turnover ratio is high, the firm is using its assets effectively in generating sales. If this ratio is low, the firm may not be using its assets efficiently and shall either increase sales or eliminate some of the existing assets. (Argenti, 2002) Solvency Ratio Gearing: Gearing reflects the relationship between a company’s equity capital (ordinary shares and reserves) and its other form of long-term funding (preference share, debenture, etc.) (Black, 2000)
Debt to equity Ratio represents long-term solvency position that indicates relation between the amount of assets financed by creditors and the amount of assets financed by stockholders. Lower Ratio is considerable
An imperative concept for any business is to know how to best adjust their assets for growth. This concept is called working capital. Net working capital is the company’s current assets minus liabilities and gross working capital is the company’s total current assets (Investopedia, 2013e). Net working capital demonstrates a company’s ability to pay back short-term liabilities using their current assets. The necessary working capital depends on the size of the company, and a diminishing or too high amount can be an indicator that assets are not being used prudently or there is excess liability. With a solid working capital, a company can determine where they can grow and best take future risks. This all culminates in the concept of an operating cycle, or the time necessary to change assets into useful resources and then again into assets.
Many researchers have studied financial relations as a part of working capital management; but, very few of them have argued the working capital policies in specific. Studies by Gupta (1969) and Gupta and Huefner (1972) studied the differences in financial ratio averages between industries. The results of both the studies were that variances do exist in mean profitability, operation, liability to equity and liquidity ratios among industry
The performance of the firms depends on working capital management effectively, if firm failed to manage working capital effectively its lead to financial crises. Working capital is needed for day-to-day operations of a firm. Net working capital is the difference of current assets and current liabilities. (M.Charitou, 2010). Current assets are converted into cash within one year of time while current liabilities are current obligation which is settled in one year of time period. The company can reduce its working capital by shortening the collection period, deferring payment and keeping minimum inventory. The management of current assets and current liabilities is important in creating value for shareholders. (T.Afza, 2009) The Working capital management is the planning and controlling of current assets and current liabilities to minimize the risk of liquidity and avoid too much investment in assets. The liquid company has also the ability to invest quickly in profitable
Investors often take a close look at liquidity ratios when performing fundamental analysis on a firm. Since a company that is consistently having trouble meeting its short-term debt is at a higher risk of bankruptcy, liquidity ratios are a good measure of whether a company will be able to comfortably continue as a going concern. Any type of ratio analysis should be looked at within the correct context. For instance, investors should always look at a company’s ratios against those of its competitors, its sector and its industry and over a period of several
In order to fully understand the company¡¦s financial position a financial manager must consider the amount of net working capital available. The net working capital is the difference between current assets and current liabilities. Companies normally have a positive net working capital. The components of working capital change continually within the cycle of operations. (Brealey, 2001) Therefore, an effective manager will monitor the cash conversion periods to determine the length of the production process. The longer the process, the longer the company¡¦s money will be tied up in the process. The two elements in the business cycle that normally absorb the most cash are inventory and receivables. The main sources of cash are payables and equity or loans. Speeding up the working capital cycle will generate more cash for the company. www.planware.org This management of working capital will allow the company to maximize its use of existing cash flows as well as leverage additional sources of working capital.
The main purpose for the working capital management is to continue its operations with the sufficient ability in satisfying both maturing short-term debt as well as upcoming operational expenses in a firm. Inventories, accounts receivable, payable, and cash are all managed by the working capital management with the necessary of a well working capital management system needs to continue to be a way for many companies to improve their earnings. Ratios analysis and management of individual components of a working capital are two main aspects of this capital.
In simple term, working capital is an excess of current assets over the current liabilities. Good working capital management results in higher returns of current assets than the current liabilities to maintain a steady liquidity position of the organisation. Otherwise, working capital is a requirement of funds to meet the day to day working expenses. So a proper management of working capital is highly essential to ensure a dynamic stability of the financial position
Efficient management of working capital is one of the pre-conditions for the success of an enterprise. Efficient management of working capital means management of various components of working capital in such a way that an adequate amount of working capital is maintained for smooth running of a firm and for fulfillment of twin objectives of liquidity and profitability. While inadequate amount of working capital impairs the firm’s liquidity. Holding of excess working capital results in the reduction of the profitability. But the proper estimation of working capital actually required, is a difficult task for the management because the amount of working
Working capital management is a very important component of corporate finance because it directly affects the liquidity and profitability of the company. It deals with current assets and current liabilities. Working capital management is important due to many reasons. For one thing, the current assets of a typical manufacturing firm accounts for over half of its total assets. For a distribution company, they account for even more. Excessive levels of current assets can easily result in a firm’s realizing a substandard return on investment. However firms with too few current assets may incur shortages and difficulties in maintaining smooth operations (Horne and Wachowicz, 2000). Efficient working capital management involves planning and controlling