Business – 10.4 Finance and accounting strategy – Use of accounting data | e-Consult
10.4 Finance and accounting strategy – Use of accounting data (1 questions)
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The balance sheet provides a snapshot of assets, liabilities and equity, which can be used to calculate key ratios that indicate whether the firm has the financial strength to pursue growth.
- Liquidity assessment: The current ratio (Current Assets ÷ Current Liabilities) shows the ability to meet short‑term obligations. A ratio above 1.5 suggests sufficient working capital to fund expansion without jeopardising day‑to‑day operations.
- Solvency assessment: The debt‑to‑equity ratio (Total Debt ÷ Shareholders’ Equity) indicates long‑term financial risk. A lower ratio (e.g.,
- Strategic implication: If both ratios are healthy, the company can justify investing in new assets, entering new markets, or increasing production capacity. Conversely, weak liquidity or high leverage would signal the need to improve cash management or reduce debt before embarking on growth initiatives.