FINANCIAL RESOURCE MANAGEMENT

Financial Resource management

Financial Resource management

Question 1

Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios can be used to analyze trends and to compare the firm's financials to those of other firms. In some cases, ratio analysis can predict future bankruptcy.

Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:

Liquidity ratios

Asset turnover ratios

Financial leverage ratios

Profitability ratios

Company 1: NBC Mining Corporation

A) Liquidity ratios

This ratio provides information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio (or working capital ratio) and the quick ratio.

1) Current Ratio

The current ratio is the ratio of current assets to current liabilities:

Current Ratio = Current Assets/Current liabilities

This Year

Current Ratio= 23000/2650

=8.6792

Previous Year

Current Ratio= 15000/2500

= 6

Analysis & Suggestion

The current ratio is increase from previous year. As the figures suggest If the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. Short-term creditors prefer a high current ratio since it reduces their risk. The higher the current ratio, the more capable the company is of paying its obligations. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry.

2) Quick Ratio

An indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets.

This Year

Quick ratio  =23000-6500/2650

=6.2264

Previous Year

Quick ratio  =15000-6000/2500

=3.6

Analysis & Suggestion

Quick ratio is increased from previous year. The higher the quick ratio, the better the position of the company. The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength.

B) Asset Turnover Ratios

Asset turnover ratios indicate of how efficiently the firm utilizes its assets. They sometimes are referred to as efficiency ratios, asset utilization ratios, or asset management ratios. Two commonly used asset turnover ratios are receivables turnover and inventory turnover.

1) Receivables turnover

Receivables turnover is an indication of how quickly the firm collects its accounts receivables and is defined as follows:

This Year

Receivables turnover = 7030/7750

= 0.90

Previous Year

Receivables turnover= 22708/7750

=2.93

Analysis & Suggestion

The receivable turnover is decreased as compared to previous year. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. By maintaining accounts receivable, firms are indirectly extending interest-free loans ...