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
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The Current Ratio is calculated by taking the current debt and dividing it by the current liabilities. It is the measurement on how a company can meet its short term liabilities with liquid assets (Loth, Rihar, 2015a).A higher ratio indicates favorable activity. A company should be able to meet it responsibilities with its
The return on sales is the key profitability ratio. This ratio tells the analyst what proportion of the revenues ...
It is another indicator of liquidity which is determined by subtracting inventory from the current assets and dividing by current liabilities. Inventories are less liquid asset, so it is eliminated in determining this ratio. This ratio is already very less and every quarter it is decreasing which indicates about the poor financial health of the company. But in case of Chevron this ratio is far ahead and fluctuates between 1.35 to 1.46, whereas Exxon values are fluctuating within the range of 0.79 and 0.61. Chevron liquidity positi...
Understanding the meaning of financial ratios is imperative to different stakeholders both within and outside of a company. Management reviews different ratios to measure how effective the strategies used to run the business are within a given time period. Money Managers and other types of investors use ratios to determine investment strategies in different types of companies. The use of the ratios helps give a consistent look at different types of businesses whether large or small and determine profitability and return on equity. The purpose of this paper is examine liquidity ratios as applied to three companies and gain understanding of how the ratios studied disclose liquidity positions.
Ratio is very useful to for understanding the message of the financial statement. It helps to enlarge the financial health and reveals the performance of a business and makes it possible to forecast about future state of the business by studying the historical data.
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.
Cash ratio – Big drop (from .35 to .087) in year 2002. In 2003 the rate grew from .087 to .460. The reason of drop in 2002 is decreased in Cash and big increase in Liabilities. The increase in 2003 occurs because of big increase in Cash and slight increase in Liabilities.
They are liquidity, profitability, and efficiency. Liquidity is ratio of assets to liabilities. This shows a company 's capability of paying their short term bills. The second is profitability and it shows the owners ability to exchange sales into profits. The last is efficiency and it includes inventory turnover and receivables turnover.
The liquidity position of a company can be evaluated using several ratios which evaluate short-term assets and liabilities and a firm’s ability to settle short-term debts (Gibson, 2011). These ratios can provide insight into a firm’s ability to repay its debts in the short term (Gibson, 2011). In turn they suggest a firm’s capacity for debt-satisfying capabilities into the future (Gibson, 2011). This paper will use financial statement data as cited in Gibson (2011) from 3M Company (3M) to better understand liquidity measures to evaluate a firm’s total liquidity position. The following paper will focus on various liquidity calculations, their meaning, and their interpretation relative to 3M. Finally, an overall view of 3M’s liquidity position will be evaluated. By analyzing a company using ratios, one can evaluate the effectiveness of its management and its strengths and weaknesses (Žager, Sačer, & Dečman, 2012).
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
By taking into account only the most liquid assets, ratio 1.0 in 2013 and 2012, which increased by a small margin 0.2 from 2011, indicates that company has strong liquidity position.
The current ratio over the three years shows that the firm has no difficulties in paying short-term liabilities in time. At every year under consideration, the current ratio is above 1 (one) indicating the firm can pay the current liabilities with the current assets without using other sources such as debt