Liquidity ratios are meant to answer the question; can a company meet its obligations over a short term? The balance sheet shows that Pet World has a positive cash flow. If a company does not have a positive cash flow or can’t generate enough cash to cover its financial obligations, the company will not be successful. According to our reading, “a current ratio greater than 1 tells us that the current assets should generate enough cash to cover current liabilities coming due, and keep the company out of short-term cash problems” (Brooks, 2013, p. 430). The current ratio for Pet World is 5.04 times which means the company is able to cover their current liabilities 5.04 times over by its current assets. The acid ratio was calculated to be …show more content…
The last ratio to be calculated from the liquidity ratios was the cash ratio. This ratio of 1.70 indicates the percent of current liabilities covered by the current cash on hand. After completion of the liquidity ratios, I have determined that Pet World will be able to meet their short-term debt obligations in a timely manner. Each ratio is over 1 which means the current assets of the company should generate enough cash to cover the current liabilities. Financial Leverage In order for us to manage a company’s long-term debt obligations, financial leverage ratios are used. The basic question that is asked is; can the company meet its obligations over the long term? In order to answer this question, we look at three ratios, debt ratio, times interest earned, and cash coverage ratio. The debt ratio was figured to …show more content…
Pet World’s profit margin is .03. This means that for every sales dollar that is generated, 3 cents of the dollar is profit. The return on assets or ROA tells us how well the assets are generating income. The ROA is .06 which means that Pet World is generating 6 cents per investment dollar. The last ratio for profitability is the return on equity. This ratio indicates how much profit the company generates for the owners based on their ownership claim (Brooks, 2013, p. 435). Pet Worlds ROE is .06. The owners are receiving 6% in return from the
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.
leverage increases, interest rate on the total debt will increase. The Company is considering the
This ratio indicates whether it can respond to the current liabilities by using current assets. As many times, we can cover short-term obligations, as better for the company. This indicates that significant and high improvement in the liquidity. The increase in the current ratio 11.5 % will result in an increase in current assets where the current liabilities increased by 2.1%.
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
When obtaining the liquidity ratio for PepsiCo I took the current assets of 2004, $8,639.00, and divided them by 2004’s current liabilities, $6,752.00. After dividing the two numbers the current ratio was 1.27:1. I followed with the 2005 year and divided the current assets by the current liabilities, $10,454.00 divided by $9,406.00, the current ratio for 2005 was 1.11:1. After finding the PepsiCo liquidity ratio I moved on to find Coca-Cola’s liquidity ratio in order to compare the two. By following the same formula I found the 2004 current assets, $12,281.00, and divided them by the current liabilities, $11,133.00, finding the ratio for 2004 to be 1.10:1. When looking for the 2005 liability ratio I took the 2005 current assets, $10,250.00, and divided
Liquidity ratios are the measure of a company’s ability to meet its short term liabilities by converting its assets into cash without losing value. The results of the liquidity ratios depend on the outcome of Current ratio and quick ratio. In the appendix-I, in 2011 Target had better Current ratio
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
The company’s debt ratios are 54.5% in 1988, 58.69% in 1989, 62.7% in 1990, and 67.37% in 1991. What this means is that the company is increasing its financial risk by taking on more leverage. The company has been taking an extensive amount of purchasing over the past couple of years, which could be the reason as to why net income has not grown much beyond several thousands of dollars. One could argue that the company is trying to expand its inventory to help accumulate future sales. But another problem is that the company’s
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
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 coverage ratios use cash flow from operations in most cases. Coverage ratios are important to long term investors and creditors because of the nature of the ratios that show the availability of cash to pay for items that include long term debts and dividends as well calculating percentages of cash flow from operations to shareholders equity, and average number of common shares outstanding (Ibarra, 2009). In addition, it has been determined that the cash flow to total debt (a coverage ratio) can be used as one of the best indicators of financial distress (Jooste, 2007). In all coverage ratios, a high ratio and increasing trends is the best case scenario.
When a company goes bankrupt, intangible assets depreciate at a much faster rate than regular assets; therefore, most pharmaceutical companies already tend to avoid debt. Therefore, in this case a high current ratio does not indicate unsatisfactory business condition, but a rather favorable and smart condition for the company.
CURRENT RATIO show a company’s ability to pay its current obligations that is company’s liquidity. The current ratio position is lower for Honda at 0.33 than for Toyota at 1.22 in 2010. Honda has a large portion of receivables in assets both in trade, notes receivables and finance receivables. It has a huge portion of cash as well. This indicates the company has no problem in terms of generating a positive influx of assets. But in terms of liabilities it has a large portion of short term debt which makes almost 1/3rd of total Current liabilities. Also there is a significant portion of Long Term debt. The higher level of liabilities in the denominator reduces the overall ratio.
Current Ratio is the relationship between a company’s current assets and current liabilities. This form of liquidity ratio also shows if the company can pay its current liabilities. A company’s current ratio can be formulated by dividing the current assets by the current liabilities. In 2016, Starbucks had a ratio of 1.05, which shows that the company has 5% cash and assets that could cover all current liabilities, thus it should not have any problems paying its current liabilities.