Liquidity of a Company During Financial Crisis - Essay Example

RECENT FINANCIAL CRISIS: LIQUIDITY OF A COMPANY and Section # of Due to the recent market slump, the going concern of many companies has become a big question and the users of the financial statements who are willing to invest in a particular company wish to assess the going concern for long time investments. The difference between the total of liquid assets and the cash flow generated by a company and payments made by the company is knows as the liquidity position of a company. (Small Biz) Many International Accounting Standards and disclosure requirements provide a good assessment of the liquidity position of a certain company and whether it is profitable to invest in that particular company. BANK OF EAST ASIA Bank of East Asia is a listed company of the Honk Kong Stock Exchange and is one of the largest banks of the region. (Wiki Invest, 2009) Here, we will analyze the liquidity position of the company through various accounting standards and disclosure requirements. CASH FLOW The international accounting standard on Cash Flow (IAS 7) gives the best overview of a companys generation of cash flows and payments. (Investopedia, 2009) the cash flows of a company tells the user of a financial statement about the amount of cash flow that a company has generated in the recent year and the amount payments made in association of the business of the company, investments, taxes, interests etc. It also informs about the amout of cash remaining in hand which can be corelated with the liabilities to gain facts whether the company would be able to meet its liabilities in the future of not. Relevance and Importance in Understanding liquidity position It is important to assess the cash flow and the ending cash of an entity to know about whether to invest in a certain company or not. The company has experienced a noticeablly lesser decrease in the ending cash and cash equivalents as the net decrease is HK$ 10,000 Million. (HK BEA, 2009) this hass given a better stability to the company since the 2008 market decline. RESERVES Reserves refers to the cash that a company holds to meet its short term and emergency liabilities. (Investopedia, 2009) the amount of cash reserves is a very important and significant tool to measure a companys liquidity position. If a company has sufficient reserves to meet their current and short term liabilities, then the company is having a good ability to meet its debts and obligations. A disclosure of the reserves is to be given in the Notes to the accounts. Relevance and Importance in Understanding liquidity position The Bank of East Asia, according to the recent accounts at hand, has sufficient amount of cash reserves. These reserves amount to a total of HK$ 28,957 Million, which includes (share premium, general reserves, exchange and revaluation reserve etc). (HKBEA, 2009) this shows that the company is able to meet its short term and future liabilities. TRADE RECEIVABLES AND PAYABLES IAS 1 requires the management to give a disclosure of the trade payables and receivables of the entity for the ending year. (IAS Plus, 2009) this gives a good overview of the amount of funds receivable from the debtors or other sources and the amount payable to creditors and others. Relevance and Importance in Understanding liquidity position The trade liabilities of the company are a total of HK$ 2,010 Million and the Trade assets amount to a total of HK$ 4,401 Million which show an upper hand of the company in meeting its short term liabilities and a satisfactory liquidity positition of the company. LIQUIDITY RATIO It is the measure of the companys capability to pay off its short term obligations and liabilities. (Investopedia, 2009) Its contains ratios such as current ratio, operating cash flow ratio and quick ratio. Liquidity ratio is the best assesment of the liquidity of a company and gives a good background of the liquidity position of the company. Relevance and Importance in Understanding liquidity position Several ratios of Bank of East Asia are stated below: Liquidity Ratio: 43.8% (last year: 38.8%) (HKBEA, 2009) Debt to Equity: 35.86 The two ratio show a good condition of liquidity of Bank of East Asia as it has ample capital and assets to meet its current obligations. It also has a good amount of assets to support its debts and have a healthy liquidity status. HENDERSON INVESTMENT LIMITED Henderson investment limited is an investment company, listed in the Hong Kong Stock Exchange. It is basically belongs to a financial industry, with sub division into Land and Real Estate Industry. (Wright Reports, 2009) the principal activities of this group are investment, development and leasing out properties. An analysis of the company in light of various IAS and disclosure requirements is given below: CASH FLOW The international accounting standard on Cash Flow (IAS 7) gives the best overview of a companys generation of cash flows and payments. (Investopedia, 2009) It also informs about the amout of cash remaining in hand which can be corelated with the liabilities to gain facts whether the company would be able to meet its liabilities in the future of not. Relevance and Importance in Understanding liquidity position Cash flow gives the best analysis of the liquidity position of a company. According to the 2009 financial report of Henderson Investment, the ending cash and cash equivalent represent a total sum of HK$ 1,420 Million which is almost double of the last years cash and cash equivalents which shows that the company has enough cash to meet its current and short term obligations. RESERVES Reserves refers to the cash that a company holds to meet its short term and emergency liabilities. (Investopedia, 2009) the amount of cash reserves is a very important and significant tool to measure a companys liquidity position. If a company has sufficient reserves to meet their current and short term liabilities, then the company is having a good ability to meet its debts and obligations. A disclosure of the reserves is to be given in the Notes to the accounts. Relevance and Importance in Understanding liquidity position Reserves give a good view of the companys paying capacity in the future and also give a view of the profitability of the entity. Henderson Investment Limited has reserves amounting to HK$ 962 Million. This gives a good view that the entity is in a commanding position as the available reserves are well over the amount required by the entity to fulfill its future, both, short term and long term obligations. TRADE RECEIVABLES AND PAYABLES IAS 1 requires the management to give a disclosure of the trade payables and receivables of the entity for the ending year. (IAS Plus, 2009) this gives a good overview of the amount of funds receivable from the debtors or other sources and the amount payable to creditors and others. Relevance and Importance in Understanding liquidity position Like every other entity, the disclosure requirement plays a very important role for the judgment of the financial position of Henderson Investment Limited. The total trade payable amounts to HK$ 50 Millions while the total receivable amount to HK$ 71 Millions. (HLD, 2009) This shows that the company has more amount receivable than payable, which shows a better liquidity position of the company. LIQUIDITY RATIO It is the measure of the companys capability to pay off its short term obligations and liabilities. (Investopedia, 2009) Its contains ratios such as current ratio, operating cash flow ratio and quick ratio. Liquidity ratio is the best assesment of the liquidity of a company and gives a good background of the liquidity position of the company. Relevance and Importance in Understanding liquidity position The liquidity ratios of Henderson Investment Limited are stated below: Liquidity ratio: 70.42% Debt to Equity Ratio: 31.84 The ratios represent a good standard of the company as far as the liquidity position is concerned. The company has enough equity to support its debt and long time liabilities. CONCLUSION It can be concluded that both the companies are strong in the respect of the liquidity, but Bank of East Asia seems to have an upper hand on few respects. Bank of East Asia has HK$ 67,326 Million of cash and cash equivalents at the end of the year while Henderson Investment Limited have cash and cash equivalents of HK$ 1,420 Million but the liquidity ratio of both the companies tells that both the companies are quite stable as far as their debts are concerned. The Debt to Equity Ratio tells that Bank of East Asia and Henderson Investment have a ratio of 35.86 and 31.84, which shows the stability in respect of debts. It can be assessed that Bank of East Asia is more liquid than Henderson Limited as it has the Capital Adequacy Ratio which is above the industrys average i.e. 14.6 % (Answers, 2009) BIBLIOGRAPHY (n.d.). Retrieved from Small Biz: http://www.smallbiz.com/functions/bizterminfo.cfm/Liquidity%20position.htm (2009). Retrieved from Investopedia: http://www.investopedia.com/terms/c/cashflow.asp (2009). Retrieved from Wiki Invest: http://www.wikinvest.com/stock/Bank_of_East_Asia_Limited_%28HKG:0023%29 (2009). Retrieved from HKBEA: http://www.hkbea.com/FileManager/EN/Content_2402/e_2009%20interim%20report.pdf (2009). Retrieved from HK BEA: http://www.hkbea.com/FileManager/EN/Content_2402/e_2009%20interim%20report.pdf (2009). Retrieved from Investopedia: http://www.investopedia.com/terms/c/cash-reserves.asp (2009). Retrieved from Wright Reports: http://wrightreports.ecnext.com/coms2/reportdesc_COMPANY_425070109 (2009). Retrieved from HLD: http://www.hld.com/eng/finan/doc/report/0809/hi_interim_2008-2009_2.pdf (2009). Retrieved from IAS Plus: http://www.iasplus.com/standard/ias01.htm (2009). Retrieved from Investopedia: http://www.investopedia.com/terms/l/liquidityratios.asp (2009). Retrieved from HKBEA: http://www.hkbea.com/FileManager/EN/Content_2396/20090825e.pdf (2009). Retrieved from Answers: www.answers.com/topic/bank-of-east-asia (2010). Retrieved from IAS Plus: http://www.iasplus.com/standard/ias36.htm Read More