2. Short-term liquidity
Liquidity reflects the ability of a firm to meet its short-term obligations using assets that are most readily converted to cash. Short-term is usually considered as in 12 months or an operating cycle of a business. Assets that may be converted into cash in a short period of time are referred to liquid assets, which are recognised as current assets in financial statements. They are used to satisfy short-term obligations, or current liabilities. Liquidity is important because of changing business operation. A business must be able to pay its financial obligations when needed. Otherwise, it will go bankrupt.
We can assess the liquidity of a business by calculating these ratios: Current ratio, Quick asset ratio.
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Not only managers must consider risk when making financial decision but also outside parties know about the company’s ability to pay debts. There are two types of financial gearing ratios, which are used to assess how much financial risk the company has taken on, are: Gearing ratio (or Component percentages) and Interest coverage ratio.
For Air New Zealand, we apply ratios as following:
Gearing ratio:
Gearing Ratio=Total LiabilitiesTotal Assets | 2008 | 2009 | 2010 | Gearing ratio | 68.60% | 68.19% | 65.93% |
In general, the gearing ratio of Air New Zealand in three year was higher than 65%. It means proportion of total liabilities in total fund (or total assets) used in Air New Zealand was higher than 2/3 which is a high gearing level. However, gearing level of Air New Zealand in 3 years decreased from 68.60% in 2008 to 68.19% in 2009 and 65.93% in 2010. This is a good sign of using fund in Air New Zealand. In fact, although main trend of both total fund and total liabilities employed in operation of the company were to go down, but value of total liabilities reduced faster than total fund, from 3,446 to 3,031 million dollars after 3 years. This is essential factor that made changes of gearing ratio.
Interest coverage ratio
Interest cover Ratio= Profit before interest and taxationInterest expense | 2008 | 2009 | 2010 | Interest cover ratio (times) | 2.09 | 0.46 | 2.13 |
1. Liquidity ratios are a class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.
The liquidity of firm can be measured by computing certain ratio’s such as current ratio and acid ratio. For measuring Target Corporation’s 2014 liquidity; the firm’s current ratio and the acid ratio is computed. The company’s current ratio is 0.91 times which is computed by comparing current asset ($11, 573,000) with current liabilities ($12,777, 000) of the year 2014 (TGT Company Financial, n.d). The firm’s acid ratio is 0.26 times which is computed by deducting inventory ($8,278,000) from current assets. The inventory is deducted from current assets because the company has not received any money for the unfinished good or from unsold inventory worth ($8,278,000). To analyze the Target Corporation’s liquidity trend in 2014; the current ratio and acid ratio of 2014 is compared with the 2015’s ratios. In 2015, the firm’s current ratio was 1.20 times and the acid ratio was 0.45 times. These liquidity ratios reflect that the firm’s liquidity was better in 2015 than 2014. (See Table 1).
Quick ratio is another measure of liquidity. In quick ratio we consider only liquid assets and its standard ratio is 1:1. Quick ratio of Peyton Approved is 7.63. Thus, there is no doubt that the company has got excellent liquidity. Company has enough liquid assets to pay off current liabilities.
Liquidity is important for any firm as it is an assessment of the ability to pay its' liabilities in the short term. There are two main liquidity ratios: the current and the quick ratio. The current ratios divides the current assets by the current liabilities to assess how many times the current assets can pay the current liabilities (Elliott and Elliott, 2011). Traditional ratios are usually in the region of 1.5, but this may vary depending on the industry and nature of the business (Elliott and Elliott, 2011). The current ratio is shown in table 1.
The current assets are those which are readily convertible into cash and cash equivalents due to their highly liquid nature and also form part of working capital of the company’s operations. However, the long term assets in contrast are not liquid because since they have a useful life of more than a year and hence their full value cannot be easily realized within
Liquidity ratios measure how well a company is able to meet its short term obligations without relying on selling inventory (David, Fred). Starbucks three main components in these current categories are cash, inventory and accrued liabilities. The current ratio indicates that if Starbucks needed to liquidate they would be able to cover their current liabilities. They would be unable to meet their outside obligations without selling off inventory to
These ratios are computed to judge the short term liquidity of the business. Two most important liquidity ratios are current ratio and quick ratio. These ratios determine the ability of firm to meets its current liabilities out of its current/quick assets.
Liquidity represents a company’s ability to pay its short-term obligations. In the following schedule is the calculation of the ratios that are indicators of the liquidity position of a company.
Liquidity ratios measure the short term ability of a company to pay its obligations and meet their needs for maintaining cash. According to Cagle, Campbell & Jones (2013), “A good assessment of a company’s liquidity is important because a decline in liquidity leads to a greater risk of bankruptcy” (p. 44). Creditors, investors and analysts alike are all interested in a company’s liquidity. After computing liquidity
Liquidity ratios measure the ability of a firm to meet its short-term obligations. A company that is not able
Liquidity In analyzing liquidity of the company, the current ratio is not very telling of a falling company. The company increased its ratio throughout the period of the income statement thus building upon its company assets and allowing for a 6-1 ratio of assets over its liabilities. This implies the company is still able to operate sufficiently even though it did not make its optimum current ratio of about 8-1. However, when one takes the inventory out of the equation with the quick ratio, the numbers show the true strength of short term liquidity. The numbers are still good, and do not indicate failure – but are
Liquidity is an important factor in financial statement analysis since an entity that can not meet its short term obligations may be forced into liquidation. The focus of this aspect of analysis is on working capital, or some computer of working capital.
These ratios help company in determining its capability to pay short-term debts. Liquidity ratios inform about, how quickly a firm can obtain cash by liquidating its current assets in order to pay its liabilities. General liquidity ratios are: current ratio and quick ratio. Current ration can be obtain by dividing company’s current assets by its’ current liabilities. Generally a current ratio of two is considered as good (Cleverley et al., 2011). Quick ratio also known as acid test determines company’s liabilities that need to be fulfilled on urgent basis. Quick ratio can be obtained by dividing quick assets by current liabilities. Quick ratio is considered as stricter because it excludes inventories from current assets. Generally a quick ratio of 1:1 is considered as good for the company. Higher quick
This group of ratios emphasis can easily indicate the Amcor’s capability to meet short term debt obligations. Current ratio and Quick ratio will be calculated in this part. These two ratios are quite similar, short term creditors, such as bankers and suppliers are interested in this class of ratios, because they can measure the short term debt-paying ability of company.
The commonness of co-agents in New Zealand has an essential effect on their capital markets, as they have generally not been openly recorded. Notwithstanding, co-agent models are developing over the long haul in both New Zealand and abroad, the same number of co-agents – in horticultural handling specifically – have go under expanding weight to raise capital. The customary co-agent structure makes disincentives for individuals to contribute capital, which has led to the development of new proprietorship structures that encourage more noteworthy investment.7 These structures range from "corresponding venture co-agents," which are generally like conventional co-agents through to "speculator offer co-agents" which look a great deal more like financial specialist arranged firms. These can be extensively classified as represented in Figure 9 underneath. As in customary co-agent models, the initial three option models hold part control and limit access to outside capital. Alternate models permit access to outer capital.