Aacounting Assignment Example | Topics and Well Written Essays - 750 words

Aacounting - Assignment Example From the analysis of the working capital, one can make a conclusion that the company is doing well because the working capital position of the company has improved from the 2005 to 2006. The current ratio is a measure that is used to show the ability of a company to clear its short term debts by the use of current assets. The preferred current ratio is usually 2:1 or 1.5: 1 depending on the industry that the company is found. The company is improving in performance and that shows that the company will be able to cater for its short term obligations. However, in comparison with the industry’s average, the company is performing the average. That means that the company has potential that it can exploit so as to be in the same level as the industry players and that would contribute to the success of the company because more investors would be attracted. The acid test ratio is used to show the ability of a company to clear its short term debts with the use of current assets but excluding inventory. Inventory may at times not be liquid and that means that it cannot be f much help in a short duration of necessity. The ratios also signify the ability of the company to cater for its short term obligation using current assts. The acid test ratio for the company is also not within the industry’s average. However, the company has made significant progress and that implies that if the trend continues, the company will be able to match the industry’s average. The return on equity is the rate at which the company is able to utilize the shareholders funds. The rate should be favorable so as to ensure that the company shareholders get a reason to always do business with the company. It shows the amount of net income that is usually returned as a percentage of the equity contributed by shareholders. The ratio is useful in the measurements of the profitability of a company because it