Fundamentals of Financial Management - Case Study Example

Current Ratio – A current ratio measures the relationship of current assets with current liabilities. This is used to analyze the solvency of a firm. The higher current ratio measures the firm’s higher rate of solvency. Acid-Test Ratio (Quick Ratio) - This ratio is used to analyze the liquidity position of a company. It helps an organization to meet the short term obligation with the liquid assets it has. A firm is evaluated to be in better condition when the quick ratio is higher.

Average Age of Receivables – While reviewing a firm’s financial health this is important because it is compared to the credit and collection policy and the industry in which the firm operates. It is countable in terms of days. The analysis shows better results if the number of days is higher. Inventory Turnover Ratio – This ratio shows a number of times the inventory of a company is being sold and replaced over a certain period of time. Generally, a low turnover indicates a bad sign for a company.

Times Interest Earned – This is a tool that is used to measure the ability of a company to meet its obligations that is related to debt. If any company fails to meet its obligations then it will be in a position of bankruptcy (Ramachandran & Kakani, 2007). Changes can occur in both the ways, positive or negative. The reason behind the lower current ratio and acid test ratio can be similar and that is cash shortage. Basically the poor credit policy and the collection process of the company can be blamed for the higher average age of receivables.

Again an inventory turnover ratio implies that the company must have tight control over the purchasing and simultaneously.