Accounting

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Liquidity, Debt Service and Profitability Ratios

Zoom Video Communication is a company offering video and communication services

including chat, video and online conferences as well as mobile chats. The technological field has

companies related to conducting research. It also develops and distributes technology products

and services as software creation, selling of computers and electronics as well as information

based on technology. These unique companies carry little to no inventory and at times they might

not be able to make revenue. They instead usually take on large capital investments or issue huge

amounts to fund research and growth. Using this company we will look at financial ratios as

liquidity ratio, debt service, and profitability in the technology industry.

Liquidity ratio gives insight into the company’s potential to meet its short-term financial

goals. To calculate and analyze the ratio: Current ratio = (Current assets ÷ current liabilities),

which is the most used liquidity ratio on a company’s ability to pay its dues on a short term (Cai,

2011). This means that the company must have a high current ratio for meeting all costs on

operations. As for cash ratio, it is the most traditional of liquidity ratios making it the hardest to

discern. To calculate this: Cash ratio = ((Marketable securities + cash) ÷ current liabilities).

The financial leverage ratio also called the debt service ratio, monitors the long-term

objective at a company’s achievement. This type of ratio considers the long term bets and

investments, all which hugely impact the companies in the technology field. To calculate this:

debt-to-equity ratio = (total debt) ÷ (total equity). The importance of this ratio is to carry out

analysis on the company as they take on large sums in investments and debt and fund tech

company research and development (Ari, 2009).

Profitability ratio is another form of the financial ratio are a good indicator of future

profitability as it is not assured that there will be profits made and it is also important to look at

the margins of these companies as gross profit margin. It is calculated: Gross Profit Margin =

(sales – the cost of the goods sold) ÷ sales. This measures the profits earned from sales but only

applicable if the company is making sales. Therefore a high gross profit margin translates into a

profitable company.

In the liquidity ratio, the current ratio translates to 14 million which can be changed to

cash within a specified period so as to pay a debt. This means the higher the figures, the less the

risk, the better for the company. Profitability ratios, on the other hand, prove that the company is

good at making money (Hull, 1999). This also means that the higher the sales, the better the

ratio. In leverage debt, we see how the debt the company took is being used and is serving the

business. Translated to debt ratio, it shows how much of the company is running on debt. And

for a company to be safe the ratio should be low which in this case is $27 million.

Zoom Video Communication is doing well compared to last year’s report. The company

has more assets than it has debt which is a good thing for the company, and as with their

operating cash, they seem to have come close having a low debt which again is better for the

company. The three ratios discussed are simple and there are many others that have got different

uses, and the disadvantages of using them.

In conclusion, the company seems to be performing okay using the financial data

provided. They are profitable compared to other tech companies and are able to stay solvent as

well as in using its assets and maximizing on its debt.

Works Cited

Ari, Y. (2009). Debt to Equity Ratio, Degree of Operating Leverage, Stock Beta and Stock

Returns of Foods and Beverages Companies on the Indonesian Stock Exchange, Journal of

Applied Finance and Accounting. 2 (2), pp. 1-13

Cai, Z. (2011). Leverage Change, Debt Overhang, and Stock Prices, Journal of Corporate

Finance, 17, pp. 391–402.

Hull, M. (1999). Leverage Ratios, Industry Norms, and Stock Price Reaction: an empirical

investigation of stock-for-debt transactions. 28 (2), pp. 32-4