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BUS 5110

Portfolio Activity UNIT #7

Every small business owner strives to make his or her firm a success. They must keep track of
their finances and make investing selections. Financial ratios are used to assess a company's
financial health to aid in this process (Cameron, 2016). The two financial documents, the
Balance Sheet and the Income Statement, are used to calculate these ratios. The net worth of the
company is shown on the balance sheet. It comprises the assets, liabilities, and equity of the
company. The Income Statement, on the other hand, depicts the flow of money into and out of
the business. It displays the current asset and liability balances (Heisinger & Hoyle,2012). A2Z
IT Consultancy Inc. is one such small business that offers students and organizations consulting
and training (A2Z IT Consulting Inc. 2020). The most crucial financial ratios for A2Z IT
Consulting Inc are explained in this article.

The current ratio is important since it demonstrates the company's current financial strength. It
shows how much larger the current assets are than the current liabilities (Cameron,2016).

Total Current Assets / Total Current Liabilities = Current Ratio

For instance, if A2Z IT Consulting owns $50,000 in cash and $150,000 in a bank chequing
account, their total assets are $200,000. Their liabilities are $100,000 if they have a $100,000
line of credit. As a result, they have a Current Ratio of 2:1. This signifies that their assets
outnumber their liabilities by a factor of two.

The Quick Ratio is the second most important ratio, as it indicates if the company can meet its
financial obligations even if something unexpected occurs. Quick Ratio = (Total Current Assets
– Total Current Inventory) / Total Current Liabilities is the formula for calculating quick ratios
(Cameron, 2016).

In the example above, if the corporation has $150,000 in inventory, the fast ratio is $200,000 -
$150,000/$100,000 = 0.5. A quick ratio larger than one is considered a healthy ratio, hence this
is not a good quick ratio. This means that the majority of the company's assets, such as
inventories, cannot be readily turned to cash when needed. Profitability, as measured by net
profit margin, is another essential ratio. Carlson (2020) defines net profit margin as the ratio of a
company's earnings (typically after taxes) to its sales. When a company's profit margin is bigger
than its competitors', it suggests it is more adaptable and efficient, and it can evaluate new
options (Carlson, 2020). The profit margin for A2Z IT Consulting is computed by dividing net
income by net sales.

Net income divided by net sales equals profit margin.

For example, if A2Z IT consultancy made $30,000 in net income last month and signed up 200
new students who each paid $1,000, the profit margin is 30,000/200,000=15%. This equates to a
profit margin of 15% for A2Z IT Consulting Inc. Finally, for a service provider company like
A2Z IT Consulting Inc., the Debt-to-Equity Ratio is critical. This ratio depicts the amount of
debt incurred for every dollar provided by the owners (Heisinger & Hoyle, 2012). Total
liabilities divided by total shareholder's equity yields the debt-to-equity ratio: Total Liabilities/
Total shareholder's equity.

This Ratio is critical for A2Z IT Consulting to determine whether or not the company is suitable
for a long-term investment. The debt-to-equity ratio is 0.5 to 1 if the company's total liability is
$200,000 and total shareholder equity is $400,000. A ratio of less than one is considered
considered acceptable because it means the company has more equity than liabilities (Heisinger
& Hoyle, 2012).
The Inventory Turnover Ratio does not applicable to a service provider business like A2Z IT
Consulting Inc because A2Z IT Consulting does not hold inventory. They are not required to
maintain track of inventory movement in the business. Because A2Z IT Consulting is a small
company with no publicly traded stock, they do not need to calculate the Market Capitalization
Ratio, which is equal to the market price per share multiplied by the number of shares
outstanding (Heisinger & Hoyle, 2012). They also don't have to calculate the Price-earnings
Ratio because the company doesn't have any shares. The Price-earnings Ratio is defined as the
market price per share divided by earnings per share (Heisinger & Hoyle, 2012).
References:
A2Z IT Consulting Inc. https://www.a2zitconsultinginc.com/.
Cameron, A. (2016, March 15). 6 Small Business Financial Ratios You Need to Know. Patriot
Software. https://www.patriotsoftware.com/blog/accounting/6-financial-ratios-smallbusiness-
owners-need-to-know/.
Carlson, R. (2020, November). What Is Financial Ratio Analysis? The Balance Small Business.
https://www.thebalancesmb.com/what-is-financial-ratio-analysis-393186.
Heisinger, K., & Hoyle, J. B. (2012). Accounting for Managers [Digital Edition version].
Creative Commons. Retrieved from https://2012books.lardbucket.org/books/accountingfor-
managers