Question

What is the debt to total assets ratio and what is it used for? What is a current asset? Where do you typically see an asset and what is it used for? What is the gross margin ratio and what is it used for? How do you calculate this ratio?

Compare and contrast your answers. What similarities and differences do you see?

Answer 1

The capital structure of the company is made up of debt and equity. Debt to total assets ratio represents the ratio of total debt used in capital structure to the total assets of the business. This depicts the ratio of total assets financed by outside borrowings rather than owners funds. This ratio is used to judge the long term solvency of the business and the risk that it faces.

Current assets are assets which can be quickly converted into cash. Examples are inventory and account receivables.

Assets are visible on the balance sheet in the assets section. It is used to understand the amount of possessions of a business. Assets may be current assets which can be converted into cash within a period of one year or fixed assets which are the long-term positions of a business such as plant and machinery.

The gross margin ratio represents the ratio of Gross profit to total sales. It is used to understand whether the cost of goods sold is too high or too low. It is a metric used to determine the company’s Financial Health and performance by revealing the profits left after deduction of the cost of goods sold.

From the above answers, we see that there are various ways to determine the Financial Health of the business. We use different ratios to ascertain the solvency, liquidity and profitability of the business.