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Financial Management - Essay Example

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According to Lenny (2004), accompany should be able to meet its debts in case they arise to avoid getting into a state of bankruptcy. This means that the company should be able to meet both…
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Financial Management
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The performance of a company is measured by its assets its ability to meet its abilities. According to Lenny (2004), accompany should be able to meet its debts in case they arise to avoid getting into a state of bankruptcy. This means that the company should be able to meet both its short term and long term liabilities. These include the debts and payables recorded for a certain period of operation. A company with a higher current ratio is in a better position to meet its debts either long term or short term. For stability of a firm, the current ration should not fall below 1. If the current ratio is below 1, the company is said to be unable to meet its liabilities.
In the M. D. Ryngaert & Co, the profitability may have contributed to the increase in the current ration and making the turnover ratio to remain constant. The profits got from the daily operations in the company are used to expand the operations thereby leading to the changes in the current ratio. This includes the gross and the net profit after the daily expenses are deducted from the revenues got. The gross profit is used to determine the margins the company is getting. In the same way, it can be a measure of the efficiency of the company in carrying out its operations (Milkovinch, 2010). On the other hand the net profitability depends on the daily expenses in the company. The higher the expenses the lower the net profit and this will affect the company’s running. This may result to the company selling some of its current assets in order to meet the liabilities.
Many scholars have advanced in the analyzing on the reasons that would lead to an increase in the current ratio while the turnover ratio remains constant. The major explanation given to this would be the improved liquidity in the company. According to Thomas (2003), liquidity is the capital already available in a firm. In a deeper explanation, a company’s liquidity is the amount of cash or capita which is available for use or spending. In the M.D Ryngaert & Co. the rise in the current ratio while the turnover ratio remains constant can be attributed to several reasons. The company may have seen an improvement in the liquidity due to some reasons. In the M. D. Ryngaert & Co, the external cash flow may have been directed to acquiring new products or the getting more employees. All this may have contributed to the rising of the increased current ratio while the turnover ratio remained constant.
In cases where the current ratio of a company falls below 1, the company is unable to meet its liabilities. In such times the company can sell some of its products and some current assets in order to meet such needs. This also affects the working capital which is one of the most important factors in the daily operations of a company. The working capital of a firm can be a good measure of the ability of the firm to meet its liabilities. Another factor that can be used to measure the ability of a company to meet its debts is the current assets in the company. The cash flow in and out of the company is determiners in measuring the stability of a firm (Milkovinch, 2010). Daily expenses in a firm determine the profitability nature of the firm. If the net profit is high, the company will be able to expand without having to sell its fixed assets. This explains the situation in which some companies have a rising current ratio while the turnover ratio remains constant.
REFERENCE
Milkovinch, G. (2010). Turnover ratios and liquidity in a company. New York:McGraw hill publishers. Read More
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