Interpretation: 53% of the total assets are financed through debts; the remaining 39% is financed through equity.
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 success of a business depends on its ability to remain profitable over the long term, while being able to pay all its financial obligations and earning above average returns for its shareholders. This is made possible if the business is able to maximize on available opportunities and very efficiently and effectively use the resources it has to create maximum value for all involved stakeholders. One way the performance of a company can be measured on critical areas such as profitability, its ability to stay solvent, the amount of debt exposure and the effectiveness in resource utilization, is performing financial analysis where a set of ratios provides a snapshot of company performance and future
3. Current Ratio: Take current assets over/divided by current liabilities for this straight forward ratio. Only main drawback is that this ratio excludes inventory, but the reason for that is because a lot of companies have difficulty with converting their inventory into cash. This can also lead to analysis being over or understated. This ratio, like the quick ratio/Acid Test, is an exceptional ratio for determining if a company can handle their short-term obligations.
There is a essential use and limitations of financial ratio analysis, One must keep in mind the following issues when using financial ratios: One of the most important reasons for using financial ratio analysis is comparability and for this, a reference point is required. Usually, financial ratios are compared to historical ratios of the business itself, competitor’s financial ratios or the overall ratios of the industry in question. Performance may be adjudged as against organizational goals or forecasts. A number of ratios must be analyzed together to get a true and reliable picture of the financial performance of the business. Relying on each ratio
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).
The Quick Ratio also known as Acid Ratio is used by firms to determine liquidity position. It explains if the firm is able to pay all of their current debt liabilities. (Dyson, 2010) The graph above illustrates that over the period from 2007 to 2011 quick ratio was not more that 1, which means that their debts might not be covered all. The graph also indicates that a peak was in 2011.
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
These numbers come out to be lower than what is considered average for a normal manufacturing company in which a satisfactory current ratio is 2.0 while a good quick ratio is considered 1.5. However according to my research on the industry those numbers seem to be the norm.
Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.
The quick ratio reflects on a company’s ability to meet its current liabilities without liquidating inventories that could require markdowns. It is a more stringent test of liquidity than the current ratio and may provide more insight into company liquidity in some cases. For Colgate-Palmolive, the quick ratio has declined from 0.73 in 2008 to 0.58 in 2010. While this does not necessarily mean a problem, a higher current ratio and quick ratio analysis will mean that the company will not have difficulty in meeting its short-term obligations from its operations and not by liquidating its assets.
You can make use of three different ratios to evaluate company and measure its financial strength. Two of the ratios viz. debt and debt-equity ratios are very common measurements. The third one, capitalization ratio, gives a proper insight in evaluating the company’s capital structure.
The quick ratio of 1.46 is a further analysis into the actual monetary values that are highly liquid and excluding fixed assets as part of the assets. The CFO/Avg. current liabilities also show a healthy 73%, 28% in 2004, on average of which is still higher than the industry.