Tootsie Roll Industries Inc: Proposal to Increase Borrowing

Favorable liquidity ratios are critical to a company and its creditors within a business or industry that does not provide a steady and predictable cash flow. They are also a key predictor of a company’s ability to make timely payments to creditors and to continue to meet obligations to lenders when faced with an unforeseen event.

Liquidity Ratio- There are several different types of liquidity ratios that can be used to determine a company’s ability to pay off short term debt obligations, but I will be using the Current ratio. I use this ratio because it shows a true picture of a company’s fiscal sustainability by accounting for all of the current assets and liabilities. The formula for Current ratio is CR= Current Assets/ Current Liabilities.

Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

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 a company’s capability in achieving their short-term financial debts, for example current assets ratio and quick ratio. (Campbell R.Harvey, 2004b)

Liquidity ratios shows the ability of a company to pay off short term obligated debts and fulfill the requirements of cash for unexpected events [1]. The comparison of the liquidity ratios of several individual companies is meaningful, only if those companies are in a same industry and legal system. In the rest of this part, we are going to discuss more details about working capital and current ratio which are 2 key indicators for displaying the liquidity of companies

According to Cleverley, W.O., Song, P.H., Cleverley, J.O, (2011), “Current Ratio is a liquidity ratio that measures the proportion of all current assets to all current liabilities to determine how easily current debt can be paid off’ (p.520). The above chart demonstrated desirable results in the year 2013 for both ratios. In addition, Cleverley et al. defined that the “Quick Ratio is a measure of the organization’s liquidity namely, cash + marketable securities + net accounts receivable/current liabilities” (p.532).

2. Liquidity ratios are used to measure the ability of the company to meet its obligations for the coming year. The main liquidity ratio is the current ratio, which is the current assets over current liabilities. The quick ratio excludes inventories from the current assets, and the cash ratio is simply the amount of cash divided by the current liabilities. These ratios are often benchmarked against industry norms and against past performance.

Liquidity ratios determine the company’s liquid assets to pay off short-term debt. The current ratio shows for every dollar of current

Financial Ratio Analysis is important for a company to use because it helps the business learn more about their company’s current financial health. There are different types of ratios that a company can perform to provide them the information from their financial statements. One of the common ratios used is to see the company’s liquidity. A liquidity ratio would help measure the company’s ability to cover their expenses. These ratios are both based off information provided from the balance sheet. The two most commonly used liquidity ratios companies use is the current ratio and quick ratio.

Another aspect of solvency we need to look at is if the companies have enough short-term assets (without selling inventory) to cover their current liabilities. This is particularly important in times of crisis, where short-term creditors are

Liquidity ratios measure the amount of cash (cash and readily convertible assets) you have to respect your commitments, and give an overview of your financial health. They furnish inform on the group capability faculty to bear the expense its short-term loans. They are unrestrained pennant for those famous short-term loans to the company. The shrewd liquidity listing are current ratio and quick ratio.

The financial health of a business greatly depends on its ability to maintain current commitments and obligations. Liquidity or the ability to generate cash from current assets to meet short-term obligations as well as unforeseen responsibility is important for the subsistence of a company. “A reasonable level of liquidity is essential to the survival of a company, as poor cash control is one of the main reasons for business failure. (Pyke, 2007) Through utilization of tools, such as liquidity ratios, or financial metrics, to evaluate the company’s ability to meet current business obligations, should the debt needs to be settled, we are able to assess its immediate financial strength. Liquidity ratios provide creditors as well as businesses a quick analysis tool, using data, which are readily available from annual financial statements, to complete these assessments. These ratios are critical to creditors and are “the most widely used ratios, perhaps next to profitability ratios.” (Joe Lan, 2002) Liquidity ratios include current ratio, quick ratio (also referred to as acid-test ratio), net working capital ratio, and cash ratio. Current ratio is the most basic or fundamental of the four and focuses mainly on current assets, while quick ratio is more stringent, eliminating inventory and prepaid expenses, as both are more difficult to liquidate (Morningstar, 2016). Cash ratio is the most “conservative”, as it mainly focuses on cash and investments

Liquidity ratios measure a business ' capacity to pay its debts as they come due. It also measures the cooperative’s ability to meet short-term 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).

Liquidity analysis can be done with the help of liquidity ratio where these ratio measure the ability and capacity of the company to pay off its debt obligation. These ratios measure the ability and capacity of a company to pay off its short-term liabilities when they fall due.