Business Administration Essay on Ratio Analysis

Published: 2021-06-25
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University of California, Santa Barbara
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Quick Ratio

The quick ratio is used to determine the capacity of an organization to pay its current liabilities when they come due with just quick assets. To calculate the quick ratio, we subtract inventory and prepaid expenses from total assets divided by current liabilities.

Quick Ratio = Total C.A. -Inventory-Prepaid Expenses/Current Liabilities

= 127,867 - 18396-95/23807


Higher quick ratios are more appealing for organizations since it demonstrates there are more quick assets than current liabilities. The acid test ratio determines the liquidity of an organization by exhibiting its capacity to pay off its current liabilities with quick assets. The ratio rises with the increase of the companys liquidity.

Current ratio

The current ratio is a useful ratio that determines an organizations capacity to settle its transient short-term liabilities with its current assets (Lappe & Spang, 2014). The current ratio is a critical measure of liquidity since short-term liabilities are payable the following year.

The current ratio is computed by dividing current assets by current liabilities. This ratio is expressed numerically instead of decimal form as shown below.

Current Ratio = Current Assets/Current Liabilities



The current ratio assists creditors and investors comprehend the liquidity of an organization and how effortlessly that organization will have the capacity to pay off its current liabilities. This ratio conveys a company's current obligation as far as current assets. A higher current ratio is better than a lower current ratio since it demonstrates the organization can effectively make current obligation payments (Simons, 2013). If an organization needs to sell its fixed assets for it to write off its current liabilities, this implies the organization isn't making enough from operations to sustain activities.

Return on Assets

The return on assets ratio is the best ratio that computes the net income generated by total assets in a period by dividing net income with the average total assets.

ROA = Net Income/Average Total Assets

= 15846/587767 *100


The ROA measures how efficiently an organization can acquire a return on its investment in assets. In essence, a higher ratio is attractive to investors since it demonstrates that the organization can adequately manage its resources to generate more income. A positive ROA ratio normally shows an upward benefit tendency.

Return on Equity

The return on equity ratio, ROE is a profitability ratio that determines the capacity of a firm to make benefits from investments of their shareholders. To arrive at the return on equity, we divide net income by shareholder's equity.

Return on Equity = Net Income/Shareholder's Equity

= 15846/125614 *100

= 12.61%

ROE measures how proficiently a company can utilize the shareholder's money to produce profits and develop the company. ROE is different from other return on investment ratios as it is profitable from the investor's perspective. That being stated, investors need to see an exceptional yield on equity ratio since it shows that the organization is effectively utilizing funds from the investors. Higher ratios are quite often superior to lower ratios, however, must be contrasted with other organizations' ratios in the business.

Performance of the Organization based on Industry Standards

Quick Ratio

Higher quick ratios are more attractive to organizations since they depict that there are more current assets than current liabilities. The organization's quick ratio of 4.59 demonstrates that current assets are more to current liabilities by more than four times. Hence, the acid ratio of 4.59 demonstrates that the organization has more current assets than current liabilities contrasted with other organizations in the business.

Current Ratio

The current ratio of 5.37 would imply that the current assets of the organization are five times more than current liabilities. In any case, a higher current ratio is better than a lower current ratio since it demonstrates the organization can write off its debts installments without any struggle as observed by the industrys average ratio of 8.6. In this way, the current ratio similarly reveals insight into the overall debt of the organization. If an organization is weighted down with a current debt, what endures is its income.

Return on Assets

The return on assets ratio measures how efficient an organization is procuring a return on its investment in assets. Similarly, ROA indicates how effectively an organization can change over the money utilized to buy assets into profits. The average of the industry 5.4% is significantly higher than the ROA ratio of 2.69% of the organization. This is because the company has less income compared to its assets as contrasted to other companies in the business.

Return on Equity

ROE measures how companies can generate profit from their investments. The industrys ratio of 14% is compared to the institutions of 12.61%. Notably, higher ratios are almost always better than lower ratios but have to be compared to other companies' ratios in the industry.

Cost Variance

The cost variance of the company is computed by forecasting the cost of the operations in the financial year comparing the figures with the actual figures. The cost variance is a result of the changes in the internal and external factors of the company in a financial year. In our case, the cost variance is shown below

Expense Variance Budgeted Actual Variance

Net Revenue $540,000.00 $ 59,900.00 $ 80,100.00

Other Revenue $ 4,000.00 $ 3,082.00 $ 918.00

Total Revenue $544,000.00 $462,982.00 $ 81,018.00


Salaries $220,553.00 $220,752.00 $ (199.00)

supplies $ 83,000.00 $ 74,584.00 $ 8,416.00

Supplies $ 72,276.00 $110,386.00 $(38,110.00)

Utilities $ 1,400.00 $ 1,200.00 $ 200.00

Other $ 2,200.00 $ 1,840.00 $ 360.00

Interest $ 2,300.00 $ 3,708.00 $ (1,408.00)

Depreciation $ 38,000.00 $ 36,036.00 $ 1,964.00

Provision for Doubtful accounts $ 16,000.00 $ 13,797.00 $ 2,203.00

Expense Variance Budgeted Open Budget Variance

Net Revenue $ 540,000.00 $ 447,805.00 $ 92,195.00

Other Revenue $ 4,000.00 $ 3,225.00 $ 775.00

Total Revenue $ 544,000.00 $ 544,000.00


Salaries $ 220,553.00 $ 220,533.00 $ 20.00

supplies $ 83,000.00 $ 73,487.00 $ 9,513.00

Supplies $ 72,276.00 $ 110,277.00 $ (38,001.00)

Utilities $ 1,400.00 $ 1,222.00 $ 178.00

Other $ 2,200.00 $ 1,838.00 $ 362.00

Interest $ 2,300.00 $ 29,946.00 $ (27,646.00)

Depreciation $ 38,000.00 $ 3,705.00 $ 34,295.00

Provision for Doubtful accounts $ 16,000.00 $ 14,721.00 $ 1,279.00

Total expenses $ 435,729.00 $ 455,729.00 $ (20,000.00)

The computation of the cost variance reveals that the difference ranged from $31150 to $37724. As such, there is need to review the differences to come up with a good way to track expenses. Decreasing and controlling working expenses has turned into a need in this fiscally challenging condition. Minimizing and monitoring operating costs are is necessary for the challenging financial environment. To reduce and control the operating expenses one can use the following steps.

The company should instill purchasing strategies which will ensure that the purchases are always authorized. As such, a check of approval procedures ought to happen to guarantee adherence.

An investigation of the current suppliers could uncover open doors for lessening expenses by merging purchases to individual providers. The result of the will be a reduction of costs associated with supplies

The company should hire experts to perform checks on areas that expenses can be reduced.


Benchmarking is the procedure by which an organization measures its items, administrations, and practices against its rivals, or those organizations perceived as pioneers in its industry. Benchmarking is one of a director's best tools for deciding if the organization is performing specific capacities and exercises efficiently (Berman & Wang, 2017).

Benchmarking centers on companys comparisons with other companies on how their performance are. An example of activities that were benchmarking involves how materials are purchased, how inventories are managed, how payrolls are processed, how suppliers are paid, how employees are trained, and so on.


Berman, E., & Wang, X. (2017). Essential statistics for public managers and policy analysts. Cq Press.

Lappe, M., & Spang, K. (2014). Investments in project management are profitable: A case study-based analysis of the relationship between the costs and benefits of project management. International Journal of Project Management, 32(4), 603-612.

Simons, R. (2013). Levers of control: How managers use innovative control systems to drive strategic renewal. Harvard Business Press.




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