1.Liquidity Analysis 1.1 Current Ratio Definition: The current ratio is a financial ratio that measures whether a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. In other words, it shows how much that a company must pay it 1 rupee of liability. Theoretical Concept: The current ratio gives a fare view to investors and creditors to understand the liquidity of a company how quickly a company is meets its short-term obligations to converted assets into cash. Let spouse if a company has current ratio is two it means a company has two rupees to pay its one rupee current liabilities. A higher current is more beneficial for a company as compare to lower ratio. The current ratio according to standard benchmark 1-2 is acceptable. The company has the current ratio equal or above 2 is much better performing it means that the company have 2 rupees to pay its 1 rupees of liability and still have 1 rupee to use for its day to day operations. …show more content…
There is not a big difference between the current and quick ratio so we can say that company is not dependent on the sale of its inventory as the termination of inventory head from the ratio there is no such big clauses. Figure 1.2 shows that company quick ratio fluctuate during last three years but low from bench mark of quick ratio. In 2013 quick ratio of company is 0.46 and 2014 is 0.31 and 2015 it is 0.34. According to the industry average we can see that the company is fall below the industry average. But industry average also fluctuates. The investor will not do a good investment but on the other hand we see raw material provides by the company has high inventory dependence it means they are buying more from him but not a good view from clients as they are sale on the credit basis that they must
Suppliers are mostly concerned with a company 's ability to pay on their liabilities. Therefore, the current ratio and the quick ratio are both looked at by suppliers. The current ratio takes a company’s current assets and divides that by the company’s current liabilities. This number is
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
LifePoint Hospitals was founded in 1999 and has grown to be a leading hospital company with more than $3 billion in revenues and 54 hospital campuses in 18 states. They have more than 23,000 employees and nearly 3,000 physician partners striving to achieve their hospital’s mission and goals.
Analyzing Wal-Mart's annual report provides a positive outlook on Wal-Mart's financial health. Given the specific ratios and its comparison to other companies in the same industry, Wal-Mart is leading and more than likely continue its dominance. Though Wal-Mart did not lead in all numbers, its leadership and strong presence of the market cements the ongoing success. The review of the current ratio, quick ratio, inventory turnover ratio, debt ratio, net profit margin ratio, ROI, ROE, and P/E ratio all indicate an upbeat future for the company. The current ratio, which is defined as current assets divided by current liabilities, is a measure of how much liabilities a company has compared to its assets. Wal-Mart in the year of 2007 had a current ratio of .90, and as of January 2008 it had a current ratio of .81. The quick ratio, which is defined as current assets minus inventory divided by current liabilities, is a measure of a company's ability pay short term obligations. Wal-Mart in the year of 2007 had a quick ratio of .25, and as of January 2008 it had a ratio of .21. Both the current ratio and quick ratio are a measure of liquidity. Wal-Mart is not as liquid as its competitors such as Costco or Family Dollar Stores Inc. I believe the reason why Wal-Mart is not too liquid is because they are heavily investing their profits for expansion and growth. Management claims in their financial report that holding their liquid reserves in other currencies have helped Wal-Mart hedge against inflationary pressures of the US dollar. The next ratio to look at is the inventory ratio which is defined as the cost of sales divided by average inventory. In the year of 2007, Wal-Mart’s inventory ratio was 7.68, and as of January 2008 it was 7.96. Wal-Mart has a lot of sales therefore it doesn’t have too much a problem of holding too much inventory. Its competitors have similar ratios though they don’t have as much sales as Wal-Mart. Wal-Mart’s ability to sell at lower prices for same quality, gives them the edge against its competition. As of the year 2007, Wal-Mart had a debt ratio of .58, and as of January 2008, it had a debt ratio of .59. The debt ratio is calculated by dividing the total debt by its total assets. Wal-Mart has a lot more assets than it does debt so Wal-Mart is not overleveraged.
The current ratio shows the ability for the company to pay back all liabilities with current assets. The fact that Raytheon has a current ratio above 1:1 means that the company could pay back all liabilities, this shows good financial health for the company.
Current and Long Term liabilities are pressuring company's ratios. Once the expansion completed and the debt shifted from current to long term, ratios will look in the favor of the company.
Overall, Horizontal analysis and financial ratios are essential factors that businesses use to monitor its liquidity. Therefore, in order to improve Apple’s ratios and profitability, the company needs to implement a strategy to increase the company’s liquidity. Business owners or managers should monitor current ratio and acid test ratio as these ratios help us to ensure the company has the proper liquid assets to pay current liabilities, to stay in operations and to expand the company. As we noted in our acid test ratio and current ratio for the company, we show a lower ratio for acid test ratio than the current ratio, which means that the company’s current assets rely on inventory. Therefore, the company needs to convert old inventory into
Of course, in most cases, with low quick ratio, this would be a bad thing and investors would be advised to stay away from this kind of company. It is because usually company with low quick ratio is not able to meet its short-term creditors demands could be facing an imminent threat of bankruptcy.
Debt Ratio and Times Interest Earned Ratio, which will be discussed for the purposes of this report. Debt Utilization Ratios indicate the solvency and long-term financial health of a company. Debt to Total Assets or Debt Ratio is a solvency ratio that indicates the degree of reliance a company places on debt to finance its assets (Rodrigues, 2014). The trend in Gemini’s debt ratio has been similar to the trend in its liquidity ratios. The debt ratio increased from 0.43 times to 0.52 times from 2005 to 2007 but declined to 0.47 times in 2008 and remained so in 2009.
Here the selected firm is a bank and hence the conventional ratios may not hold the same significance as it does for the firms in other industries. For a bank the deposits is their liabilities and hence the loans which banks gives are their assets. Thus the bank balance sheet will consist of only the deposits and the loans. Hence the current ratio will not make the same sense as it does for other firms. The current ratio of the firm is 0.209. Since the bank does not have inventories and other short term assets, quick ratio cannot be calculated or is the same the current ratio since there are no inventories. Also the cash ratio is also the same as the current ratio for the reasons mentioned above (Wells Fargo, 2014).
Explain how accounts receivable are created and managed, and compute the cost of trade credit.
information and may not be enough to meet present and future needs of a company. Many companies are unique in size, operation, location, and management. Thus, comparing the companies in same industry with such uniqueness might not provide useful comparable information. For example, comparing a company renting its plant and a company purchasing its own assets will be irrelevant in terms of financial analysis. Some companies might increase the current ratio by increasing the debt before the year-end in order to make their balance sheet look better for that year.
The Quick Ratio shows that the company’s cash and cash equivalents are the highest t...
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound.
Inventory, for example, may be difficult to sell and can highly impact a firm’s ability to pay on its liabilities. The second type of liquidity ratio is the quick ratio, which is similar to the current ratio, but it takes into account the inconvertibility of inventory. It is important to compare these ratios to industry standards for proper analysis to prevent a skewed understanding of a firm’s performance. A retailer, for instance, Target or Walmart that has a high volume of inventory would have a different benchmark than a company that has essentially no inventory, such as a day care