The Liquidity Position of the Company - Case Study Example

PART ONE; Ratio Analysis Analysis of the company (FSI) 1. Profitability ratio Net margin The net margin for the company 0.04 for the period 2014/15 which implies that the profitability of the company is less risky and hence the dividend paid is constant. ROE The return on equity as observed in the excel for FS1 is 0.06 and 0.11 for the financial period 2014/15 respectively. This depicts a growth which is an indication that the liquidity position of the company is improving and hence, the working capital is efficient. 2. Liquidity ratio The liquidity ratio is the ratio of current asset to current liability. Quick Ratio The quick ratio for the company is 1.94 and 2.25 for the year 2014/15 respectively. This depicts a growth in cash ratio for the company and hence, the company amount of liquid cash to current liabilities is growing. Cash Ratio The cash ratio for the company is 0.83 and 1.11 for the financial period 2014/15 respectively. This depict a growth in cash ratio which implies that the liquidity situation of the company in meeting the current liabilities is improving[Asw10] Current ratio The current ratio of the company depict a declining trend since, the value of cash ratio is 4.68 and 3.93 for the financial period 2014/15. This is sign of liquidity risk since; the rate at which the company meets its short term obligation when they fall due for payment is declining. 3. Liverage debt ratio Total debt ratio This ratio evaluates the extent of business leverage. For the company, the total debt ratio is declining from 2.3 to 2.05 for the financial period 2014/15 respectively; the implication is that, the leverage situation of the company is at risk. Long term debt ratio The long term debt ratio for the company depicts a value of 0.12 and 0.06 for the financial period 2014/15 respectively. This depict a declining trend and thus, it is an indication that proportion of long term debt to net asset as source of finance for the company is declining[Mic08]. Times interest earned ratio The times interest earned ratio for the company remain fixed at 5.14 for the financial period 2014/15; the implication is that the company’s ability to meet its dent obligation as and when they fall due for repayment is fixed. 4. Asset Utilization Inventory turnover The inventory turnover for the company depicts an increasing trend fromm1.57 in 2014 to 4.73 in 2015. The implication is that, the company sales turnover is improving and thus the company’s profitability is growing. Account receivable turnover The account receivable for the company is 10.65 and 20.52 for the financial period 2014/15 respectively. This depicts a growth and thus, it implies that the ability of the company to collect its debtors for the year is improving[Ümi13]. Account payable turnover The account payable for the company depicts a growth from 5.26 to 9.63 for the financial period 2-014/15. This implies that the ability of the company to pay it suppliers is growing each financial period. Analysis of the company (FS7) 1. Profitability ratio Net margin The net margin for the company 0.3 for the period 2014/15 which implies that the profitability of the company is less risky and hence the dividend paid is constant. ROE The return on equity as observed in the excel for FS1 is 0.56 and 0.78 for the financial period 2014/15 respectively. this depict decline in trend which is an indication that the liquidity position of the company is at risk and hence, the working capital is not effective making the business risk of liquidity growing. 2. Liquidity ratio The liquidity ratio is the ratio of current asset to current liability. This ratio indicates the ability of the company to meets its obligation as and when they fall due for repayment, as well as, being concerned with the short term loans Quick Ratio The quick ratio for the company is 1.28 and 1.39 for the year 2014/15 respectively. This depicts a growth in cash ratio for the company and hence, the company amount of liquid cash to current liabilities is growing. The current asset used in the quick ratio is cash, account receivables and the notes to receivables Cash Ratio This ratio is a conventional liquidity ratio in view of the fact that it involves the current asset exclusive of the most liquid cash and cash equivalents. The cash ratio for the company is 0.28 and 0.25 for the financial period 2014/15 respectively. This depict a decline in cash ratio which implies that the liquidity situation of the company in meeting the current liabilities is at risk since, there will be less cash to finance the current liabilities effectively[Ümi13]. Current ratio The current ratio of the company depict a declining trend since, the value of cash ratio is 2.90 and 2.72 for the financial period 2014/15. This is sign of liquidity risk since; the rate at which the company meets its short term obligation when they fall due for payment is declining. The short-term creditors finance considers current ratio since it reduces their risk. The shareholders of the business have a preference of low current ratio to guarantee that there are adequate funds for business growth. 3. Liverage debt ratio Total debt ratio This ratio evaluates the extent of business leverage. For the company, the total debt ratio is declining from 0.24 to 0.22 for the financial period 2014/15 respectively, the implication is that, the leverage situation of the company is at risk since, the total; debt to long term asset ratio is declining. Long term debt ratio The long term debt ratio for the company depicts a value of 0.0047 and 0.0043 for the financial period 2014/15 respectively. This depict a declining trend and thus, it is an indication that proportion of long term debt to net asset as source of finance for the company is declining. Times interest earned ratio The times interest earned ratio for the company remain fixed at 19.26 and 12.89 for the financial period 2014/15 which depict a growth in time interest earned ration. The implication is that the company’s ability to meet its debt obligation as and when they fall due for repayment is improving. 4. Asset Utilization Inventory turnover The inventory turnover for the company depicts an increasing trend fromm3.97 in 2014 to 4.85 in 2015. The implication is that, the company sales turnover is improving and thus the company’s profitability is growing. Account receivable turnover The account receivable for the company is 13.52 and 11.78 for the financial period 2014/15 respectively. This depicts a decline and thus, it implies that the ability of the company to collect its debtors for the year is at risk and thus, the company cannot finance its working capital effectively. Account payable turnover The account payable for the company depicts a growth from 3.77 to 4.45 fore the financial period 2-014/15. This implies that the ability of the company to pay it suppliers is growing each financial period. Recommendations as to whether proposal 1 should be adopted From the investment appraisal analysis, it can be concluded that proposal one investment should be accepted for investment since; the investment alternative will generate a positive returns of 78,825 as depicted in the net present values. The investment alternative depicts an internal rate of returns of 17% which is quite as compared to the 10% cost of capital which in turns guaranties positive returns. The investment analysis depict that, it will take just 2.3 years to recover the amount invested in the project as observed in the payment period analysis[Mic08]. The overall conclusion s that, an investment should consider venturing in proposal one since, there is guaranteed returns within the shortest time possible and thus, it proposal one is deem as viable venture[Asw10]. Bibliography Asw10: , (Damodaran, 2010), Mic08: , (Ehrhardt, 2008), Ümi13: , (Hacioglu, 2013), Read More