Liquidity Ratios and Activity Ratios
2 Liquidity Ratios
Liquidity ratios measure a business ' capacity to pay its debts as they come due. It also measures the cooperative’s ability to meet shortterm obligations. Liquidity refers to the solvency of the firm’s overall financial position – the ease with which it can pay its bills. Because a common precursor to financial distress and bankruptcy is low or declining liquidity, these ratios can provide early signs of cash flow problems and impending business failure. The two basic measures of liquidity are the current ratio and the quick (acid test) ratio (Gitman, 2009).
1. Current ratios
The current ratio is current assets divided by current liabilities. The current ratio …show more content…
Quick Ratio = Current assets – Inventory / Current Liabilities Figure 2.2 explained the company’s quick ratio has been improving from year on year from 0.51 in 2007 to 0.63 in 2008 and then increased to 0.69 in 2009. Quick ratio for 2009 is higher compared to the industry average quick ratio that is 0.65. Even though it has shown incremental improvement of their quick ratio and surpassed the industry average of 0.65 acid tests, the firm would have to sell inventory to meet its obligations. Comparing quick ratios over an extended period of time can be used to signal developing trends in a company. While modest declines in the quick ratio do not automatically spell trouble, uncovering the reasons for changes can help to find ways to nip potential problems in the bud. As for PJV’s case, this is a good sign that the company progress steadily in improving its quick ratio over 3 years period in which may be resulting from its reduced inventories in 2009. The company’s quick ratio can further be increased to a satisfactory level (at least 1:1) by improving its collection system and policy. Like the

Liquidity Ratios
1068 Words  5 PagesProfitability Ratios  Johns Corp  Smith Corp  Profit Margin  7.4%  5.25%  Return On Assets  18.5%  12%  Return on Equity  29%  34%  Assets Utilization Ratios    Receivable Turnover  15.6  14.29  Average Collection Period  23 T  25 T  Inventory Turnover  25  13.3  Fixed Assets Turnover  3.57  4  Total Assets Turnover  2.5  2.3  Liquidity Ratios    Current Ratio  0.83  0.65  Quick Ratio  1.0  1.5  Debt Utilization Ratios    Debt…

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1051 Words  5 PagesBased on the liquidity ratio above they measure ATM’s ability to cover its financial obligations in the next accounting period. The current ratio displays, ATM had a sufficient ratio in 2015 and 2014. A ratio of 2.09 in 2015 compared to 2.86 in 2014 shows a contrast with figures in which in 2014 the current ratio can be quite worrying for the reason that ATM held excess cash of $15,979 million that could possibly be invested elsewhere in the organization during 2014. The quick ratio is relatively…
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