Question

What is the difference between:

- Working capital and owner equity

- Vertical analysis and horizontal analysis

- Return on revenue and return on equity

Answer 1

Working capital and owner equity

There are two types of working capitals : Gross working capital and Net working capital. Gross Working capital refers to the current assets of the business. Net working capital refers to the difference between current assets and current liabilities.

Owner's equity refers to the funds invested in the business by the owners. Stockholders are considered to be the real owners of the business. Hence, owner's equity refers to the common stock, preferred stock and retained earnings.

Vertical analysis and horizontal analysis

Horizontal analysis reviews and analyses Financial Statements of a number of years and is, therefore, based on financial data taken from those years. It is also called Dynamic Analysis. Comparative balance sheet and comparative income statement are examples of horizontal analysis.    Vertical or Static Analysis reviews and analyses the financial statements of one particular year only. This type of analysis is also called Static Analysis. Common size balance sheet and common size income statement are examples of vertical analysis.

Return on revenue and return on equity

Return on revenue refers to the ratio of net income to sales. It expresses net income as a percentage of sales.

Return on revenue = Net income/Sales

Return on equity refers to the ratio of net income to equity. It expresses net income as a percentage of equity.

Return on equity = Net income/Stockholders' equity

Return on revenue and return on equity both are profitability ratios. Higher these ratios, better these are.

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