1.1 Current Ratio
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
Various ratios are used in this analysis. The organization’s WIP and FG inventory turnover ratios from 2009 demonstrate that the firm takes fewer days to sell both inventories (3.64 days and 73.43 days respectively) than the average firm in the industry In 2009, the total asset turnover ratio for Gemini Electronics was 1.37 while the industry average was 1. This is an indication that Gemini Electronics is generating business at a steady pace. Gemini Electronics is utilizing its fixed assets at a higher rate than other firms in the industry. Their utilization shows the Gemini’s ability to use L, P, & E in order to generate sales. Gemini Electronics A/R is 40.16, which is 25% higher than the industry average. This means Gemini Electronics waits about 40 days to receive payment for goods sold. High levels of A/R can negatively affect the firm and their stock
It shows the investors that how liquid the inventory of the company is. This ratio measures and shows that how easily a company can turn its inventory or merchandise into cash. The increase in the ratio clearly indicates that the management of the company is managing its merchandise in an efficient and effective manner and it is also contribution to the profits of the company.
Ratio analysis is a widely used of financial analysis. It is defined as the systematic use of ratio so that the financial statements can be interpret to find a firm’s strengths and weakness as well as its historical performance and current financial condition. Ratios reveal the relationship in a more meaningful way so as to enable us to draw conclusions from them.
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.
The increasing trend in the quick ratio from 4.7 to 7.7 during 2013 – 2014 shows that its quick assets are more as compared to its current liabilities. This shows that the firm is easily paying off its current liabilities. Similarly, the increasing trend in the current ratio reflects that the firm is easily paying off its current debts by using profits generated from its current operations. Likewise, the increasing trend in the asset turnover ratio means that the firm is using its assets productively.
Currently, the quick ratio is 0.45 which clearly shows a lack of ability to cover short term cash needs. The liquidity decreased from the same period a year ago, despite already having weak liquidity to begin with. This would indicate deterioration cash flow.
Current ratio: This number is found by dividing the current assets by the current liabilities that is found on the balance sheet. The current ratio for 2010 was .666. This was calculated by $1550,631 / $2,326,966. The current ratio for 2011 was .905. This number was calculated by $1,543,816 / $1,705,132.
High current ratio is a clear indication that company is able to meet its current liabilities and manages very well its liquidity position. However, quick ratio will provide a better view.
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.
The concept of liquidity has been a complex financial concept. However, the characteristics of asset that are liquid are observable. In its simplest form, liquidity implies the ease at which a financial asset trades. Liquidity of any market is characterized by the ability of investors to buy and sell securities easily. Illiquidity occurs when an asset or securities cannot be transacted quickly and converted into cash (Clark 2008). According to Pastor and Stambaugh (2002), liquidity denotes the ability to trade large quantities quickly, at low cost, and without moving the price. Liquidity plays a great role in attempting to resolving a number of asset pricing puzzles such as the small-firm effect, the equity premium puzzle, and the risk-free rate puzzle (Amihud, Mendelson and Pedersen, 2005).