To understand the key decisive factor in working capital management with the help of liquidity ratios. Late Date 24 Oct 2012
After going through this GDB, the student will be able to recognize the importance of working capital management.
Eco Tyre Ltd. (ETL) – incorporated in year 2003 and entered into automobile tyre manufacturing business by introducing a new tire manufacturing technology. Over the years, ETL has been recognized as a tyre market leader. But, now a day, ETL is facing hard time due ineffective control of its working capital items.
Following data has been developed from its comparative balance sheets:
Ratio FY 2010 FY 2011
Current Ratio 0.60 Times 0.79 Times
Quick Ratio 0.45 Times 0.61 Times
Return on Asset 9.7% 12.5%
Inventory Turnover 28 Times 15 Times
Avg. Collection Period 13 Days 24 Days
Short-term Debt 4 million 4 million
Total Asset Turnover Ratio 2 Times 5 Times
Credit Sales to Cash Sales Ratio0.45 Times 0.67 Times
Being a financial analyst, do you think the liquidity of a company is satisfactory?
Liquidity is a measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this. 2. Accounting: The ability of current assets to meet current liabilities. 3. Investing: The Liquidity quickly convert an investment portfolio to cash with little or no loss in value.
Liquidity Ratios are ratios that come off the Balance Sheet and hence measure the liquidity of the company as on a particular day i.e the day that the Balance Sheet was prepared. These ratios are important in measuring the ability of a company to meet both its short term and long term obligations.
The liquidity of a company is unsatisfactory. Since, the current ratio is also the liquidity ratio. As long as the current ratio is between 1.5-3 the company is good. However below 1 means those current liabilities are exceeding current assets. Current assets cannot pay its current obligation. Currents assets must be two time of current liabilities