Case Study: Padini Holdings Berhad

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).

The current ratio shows the short-term debt-paying ability of the company also known as liquidity ratio. Components of the current ratio are current assets and current liabilities. To find the current ratio, divide current assets by current liabilities. For example if a current ratio was 2:1, then that company would be able to pay off its short term debt easily. But you should also look at the types of debt the company has because some assets might be larger. For the current ratio a rule of thumb is the ratio should be around 2:1. The company wants to at least make sure that the value of the current assets covers at least the amount of the short-term obligations. In 2013 the current ratio is 1.75 and in 2014 the current ratio is 1.8. This is showing a favorable

• Present 5 years of statements – Ratio – Trend Analysis – See if ratios are improving

First of which, is the current ratio. It has been rapidly declining since 2000. To me this indicates that there is a liquidity issue. Each year their trade debt increase exceeds the increase of net income for the company. As a result, the working capital has taken a nosedive from $58,650 in 2002 to only $5,466 in 2003.

The return on shareholders’ fund, capital employed, total assets all have gone down during this period. The ability of the company to pay its short term debt hasn’t varied much, but the administrative expenses have gone up by a very large amount.

This ratio is similar to current ratio, except that it excludes inventory from current assets. Inventory is subtracted because it is considered to be less liquid than other current assets, that is, it cannot be easily used to pay for the company’s current liabilities. A company having a quick ratio of at least 1.0, is considered to be financially stable. It has sufficient liquid assets and hence, it will be able to pay back its debts easily (Qasim Saleem et al., 2011).

Overall regards to liquidity ratios, the higher the number the better; however, a too high also indicates that the firms were not using their resources to their full potential. Current ratio of 1.0 or greater shows that a company can pay its current liabilities with its current assets. JWN’s ratio increased from 2.06 in 2007 to 2.57 in 2010, and slightly decreased to 2.16 in 2011. JWN’s cash ratio increased significantly from 22% in 2007 to 80% in 2010. JWN has a cash ratio of 73% in 2011, which is useful to creditors when deciding how much debt they would be willing to extend to JWN. In addition, JWN also has moderate CFO ratio of 46%, indicating the companies’ ability to pay off their short term liabilities with their operating cash

Return on net assets = Net Income in Statement of Operations / Net Assets in the Balance Sheet

Also, according to its leverage ratios, the company’s debts are not only very high, but are also increasing. Its decreasing TIE ratio indicates that its capability to pay interests is decreasing. The company’s efficiency ratios indicate that despite the fact that its fixed assets are increasingly being utilized to generate sales during the years 1990-1991 as indicated by its increasing fixed asset turnover ratio, the decreasing total assets turnover indicate that overall the company’s total assets are not efficiently being put to use. Thus, as a whole its asset management is becoming less efficient. Last but not the least, based on its profitability ratios, the company’s ability to make profit is decreasing.

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

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.

In year 2007 quick ratio reached dangerous point – 1,02, company’s ability to pay its short-term obligations was badly influenced by the increase in short-term liabilities In 2008 meaning of the ratio grew up, because of the factors listed above. In year 2009 both ratios fell, since company took more liabilities than in 2008: its short-term borrowings, current tax and short-term provisions increased Average showings on AstraZeneca Quick ratio during the period was 1,13, while GSK – 1,22 which again proves that GSK was more liquid during the analysed period.

Company D has higher current ratio and quick ratio which is higher 2.43x and 2.3x respectively. This was because Company D had higher cash and short term investment which was 55.6% while Company C only has 1.4%. It proves that Company D is financially conservative and it matches with the second described company.

Current ratio of Company X and Y is 1.80, and 2.55 respectively. This ratio presents the proportion of current assets to current liabilities. This ratio provided a measure of degree to which current assets cover current liabilities. Since both companies have excess of current assets over their current liabilities, they met basic requirement of safety margin against uncertainty in realization of current assets and funds flows. Generally, it is suggested that a firm should have neither a very high ratio nor a very low ratio. Very high ratio implies heavy investments in current assets reflecting under utilization of the resources. A very low ratio endangers the business in to risks of not being able to pay short term requirements. Normally, it is advocated to have the current ratio as 2:1 (Baker and Powell, 2009).