Business Analysis: Liquidity Ratio

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Liquidation ratio Liquidity Ratio (LR) measures the short term solvency of the business. LR measures the ability of the business enterprise to meet its short term obligation as and when they are due. The liquidity ratios are also called the short- term solvency ratios. The most common ratios which measure the extent of liquidity or the lack of it are: a) Current ratio b) Cash Ratio The current ratio is defined as Current assets/ Current liabilities. In the year 2012, the current ratio is 1.04 while it increases to 1.11 in the year 2013. Current ratio of more than 1 shows adequate liquidity of the firm but it should be around 2. However, we can see that there is a minor increase in the current ratio but it is expected to rise more in future. …show more content…

Short term liabilities can be met either by cash or marketable securities. Cash can be better utilized in contingencies or can be used in business for very short term operational requirements. It is good for the business to use its large portion of cash for that purpose rather than to meet the creditors’ obligation. So the cash ratio of MCS is very poor and therefore it has to ensure increase in near future. Profitability Ratios Every business must earn sufficient profits to sustain the operations of the business and to fund expansion and growth and reward its shareholders. Profitability ratios are used to analysis the earning capacity of the business which is the outcome of utilization of resources employed in the business. There is a close relationship between the profit and the efficiency with which the resources employed in the business are utilized. Some important Profitability ratios are a) Net Profit …show more content…

In year 2012, it is -5% but in 2013, it is improved to 2%. Operating ration shows the operational efficiency of the business. A small value of operating ratio shows that MCS has to take care of its operational activities so further this ratio may be improved. Return on Equity (ROE) is defined as net profit/Total equity. This ratio shows how much company earned on the money of shareholders. In 2012, ROE is deeply negative at 44.4% but in 2013, it got significantly improved and touched 6.5%. However, it can’t be treated as a healthy figure but in comparison to profit margin or operating ratio, it is a respectable one. Return on Assets (ROA) is defined as net profit/total assets. This ratio shows the earnings on employed assets. Higher the ROA, more efficiently assets have been used. In 2012, it is -13.6% but in subsequent year 2013, it is improved to 1.6%. This ratio is also low and need serious attention. Long Term Debt paying ability Long term debt paying ability of firm is mainly measured by three ratios

In this essay, the author

  • Explains that every business must earn sufficient profits to sustain its operations and to fund expansion and growth and reward its shareholders. profitability ratios are used to analyze the earning capacity of the business.
  • Explains that following ratios have been used to measure the degree of asset utilization or management efficiency.
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