Analyzing Redcorp's Liquidity Ratio

Liquidity described by Easton et al. (2018) “refers to cash availability: how much cash a company has, and how much it can raise on short notice” (p. 4). Therefore, liquidity ratio analysis is a financial health measure that investigates if a company’s current assets are enough to meet the company’s short-term debt obligations. Two common liquidity ratios are the current ratio and acid test ratio (quick ratio).

Current Ratio. The current ratio equals current assets divided by current liabilities. Although Redcorp’s 2015 ratio of 1.57 is a slight decline from its previous two years, a ratio “generally between 1.5% and 3%” (Pastrick, 2017) is considered a healthy financial ratio. Therefore, there is no indication of concerns, especially when

It is calculated as the net income divided by sales. This ratio measures the company’s ability to cover their operating costs including indirect costs, unlike gross profit margin which does not consider indirect costs (Poznanski, 2013). The higher the profit margin, the more efficient the company is at turning sales into actual profit. Ideally, companies should have profit margins that are improving over time and are on par with or better than the industry average. Redcorp Inc. has a profit margin of 13.97% for 2015, which is better than the industry average of 13% and their profit margin has been increasing year over year since 2013. Based on looking at their profit margin compared to industry average as well as the improvement over time, it appears that Redcorp Inc is a profitable company and that they have been taking measures to continue to sustain and improve profitability. This could include things like lowering their expenses and costs, or by increasing product prices. Ideally, the company’s underlying costs should be analyzed as well as their pricing structure in order to fully understand their