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Ratio analysis

 

 

Learning Objective:

To understand the key decisive factor in working capital management with the help of liquidity ratios.

 

Learning Outcome:

After going through this GDB, the student will be able to recognize the importance of working capital management.

 

The Case:

Eco Tyre Ltd. (ETL) - incorporated in year 2003 and entered into automobile tyre manufacturing business by introducing a new tire manufacturing technology.  Over the years, ETL has been recognized as a tyre market leader. But, now a day, ETL is facing hard time due ineffective control of its working capital items.

 

Following data has been developed from its comparative balance sheets:

 

Ratio

FY 2010

FY 2011

Current Ratio

0.60 Times

0.79 Times

Quick Ratio

0.45 Times

0.61 Times

Return on Asset

9.7%

12.5%

Inventory Turnover

28 Times

15 Times

Avg. Collection Period

13 Days

24 Days

Short-term Debt

4 million

4 million

Total Asset Turnover Ratio

2 Times

5 Times

Credit Sales to Cash Sales Ratio

0.45 Times

0.67 Times

 

Required:

Being a financial analyst, do you think the liquidity of a company is satisfactory?

Support your answer with logical reasoning.

 

Important Instructions:

  1. Your discussion must be based on logical facts.
  2. The GDB will remain open for 3 working days/ 72 hours.
  3. Your answer should be relevant to the topic i.e. clear and concise.
  4. 4.       Your discussion should not exceed 60 words.
  5. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
  6. Obnoxious or ignoble answer should be strictly avoided.
  7. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

  • For detailed instructions, please see the GDB announcement.

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Replies to This Discussion

sir m tariq malik m asking to youplz give me answer

the liquidity of a company is unsatisfactory. Since, the current ratio is also the liquidity ratio. As long as the current ratio is between 1.5-3 the company is good. However below 1 means those current liabilities are exceeding current assets. Current assets cannot pay its current obligation. Currents assets must be two time of current liabilities.


The calculation of a company's available cash and marketable securities against outstanding debt. The ratio measures the company's ability to pay its short-term debts. A high ratio indicates a company with a low risk of default.


Idea Solution

Being a financial analyst, I think the liquidity of a company is unsatisfactory. Since, the current ratio is also the liquidity ratio. As long as the current ratio is between 1.5-3 the company is good. However below 1 means those current liabilities are exceeding current assets. Current assets cannot pay its current obligation. Currents assets must be two time of current liabilities.

 MGT201 GDB # 1 FALL 2012 IDea 

please visit page # 15 of lec 3 SOME FINANCIAL RATIOS for better understanding

the liquidity of company is not desirable or not satisfactory cause the Quick and current ratio of a company is very low compare to a desired Quick and current ratio

Liquidity is a measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this. 2. Accounting: The ability of current assets to meet current liabilities. 3. Investing: The Liquidity quickly convert an investment portfolio to cash with little or no loss in value.

Liquidity Ratios are ratios that come off the Balance Sheet and hence measure the liquidity of the company as on a particular day i.e the day that the Balance Sheet was prepared. These ratios are important in measuring the ability of a company to meet both its short term and long term obligations.
The liquidity of a company is unsatisfactory. Since, the current ratio is also the liquidity ratio. As long as the current ratio is between 1.5-3 the company is good. However below 1 means those current liabilities are exceeding current assets. Current assets cannot pay its current obligation. Currents assets must be two time of current liabilities.

idea Solution:

Liquidity of the company is not satisfactory short term debt.

It is unsatisfactory, since, the current ratio is also the liquidity ratio. 

As long as the current ratio is between 1.5-3 the company is good. 
However below 1 means that current liabilities are exceeding current assets.

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