FINANCIAL MANAGEMENT

Financial Management

Financial Management

Question#1

Liquidity ratios

 

 

 

Current Ratio = Current Assets Current Liabilities

2009

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.56639

= £2,346.00

 

 

 

0.89089

= £3,111.00 £4,142.00 £3,492.00

 

 

2007

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.94648

= £3,431.00

 

 

 

1.06818

= £3,666.00 £3,625.00 £3,432.00

 

 

If we will look at the current ratio of the company over the past four year, the liquidity position of the company is not good enough to support the assumption that company is doing great. The current ratio of 0.56:1 to indicate the company is short of almost same amount i.e. 0.5 pounds to meet its current obligations. However, the past result shows that the company has done well in the past as compared with the current year liquidity ratio. In 2006, the company has almost same amount of pounds available to meet its current liabilities. Overall, the trend shows that company's current ratio is decreasing as the years are increasing.

Managers and Creditors:

The ratio will benefit the mangers of the company and the creditors especially, so as to decide whether to lend more money to the company or not. On the other hand, managers will look at this ratio so as to work on the liquidity position of the company accordingly.

Quick Ratio = Current Assets - Inventory Current Liabilities

2009

2008

 

 

 

 

 

 

 

 

 

 

 

0.53573

= £2,346.00 - £ 127.00

 

0.85882

= £3,111.00 - £ 112.00 £ 4,142.00 £ 3,492.00

2007

2006

 

 

 

 

 

 

 

 

 

 

 

0.92552

= £3,431.00 - £ 76.00

 

1.044

= £3,666.00 - £ 83.00 £ 3,625.00 £ 3,432.00

Quick ratio is also related with the ability of the company to meet its current liabilities, but by excluding the inventories (Garrison et al., 2003; Ross et al., 2008). Since, inventories cash conversion cycle might took longer time. So, the quick ratio of the company is almost similar to the current ratios. It means that company has low level of inventories in its current assets, which can be considered good from the creditors' perspective. The quick ratio of 0.53 in the year 2009 is bit short to meet one pound of its liabilities. Yet, the year 2006 is good as for as the liquidity of the company is concerned. Creditors:

Creditors will definitely look at the quick ratio as compared to the current ratio. Since, quick ratio eliminated the inventories company might have in its balance sheet. This is why because creditors would like to know how much the readily available cash is there at the company end to pay its current liabilities. Since the industry ratio is not available it cannot be considered as bad ratio.

Net Working Capital Ratio = Current Assets - Current Liabilities Total Assets

2009

2008

-0.17124

= £2,346.00 - £4,142.00

 

-0.03374

= £3,111.00 - £3,492.00 £ 10,488.00 £ 11,292.00

2007

2006

 

 

 

 

 

 

 

 

 

 

 

-0.01704

= £3,431.00 - £3,625.00

 

0.01922

= £3,666.00 - £3,432.00 £ 11,384.00 £ 12,174.00

Net working capital ratio is also look at the same evidence of whether company's short term assets have the ability to cover its short term debt. Over the past four years, except year 2006, company has reported negative working capital ratio. This means that company's operations certainly lack cash for the effective ...