Limited Time OfferFLAT 20% off & $20 bonus sign up. Order Now
New! Hire Essay Assignment Writer Online and Get Flat 20% Discount!!Order Now
Dividends declared in 2006 were 8 cents per share and in 2007 10.5 cents per share.Calculate the Current ratio and the Quick ratio for 2007. Comment on the liquidity of this company.
For comparison purposes, other firms in this industry sector have an average Current ratio of 1.76 and an average Quick ratio of 0.78.
Current ratio = Current Assets / Current Liabilities
Particulars | 2007 | 2006 |
Current assets | 180,742 | 155,530 |
Current Liabilities | 105,064 | 75,129 |
Current Ratio | 1.72 | 2.07 |
Quick Ratio = Quick Assets / Current Liabilities
Particulars | 2007 | 2006 |
Current assets | 180,742 | 155,530 |
Less: Inventories | (159,880) | (135,021) |
Quick Assets | 20,862 | 20,509 |
Current Liabilities | 105,064 | 75,129 |
Current Ratio | 0.20 | 0.27 |
To analyze the company’s data, in 2007, the company’s current ratio was 1.72 times which shows that the company is able to generate $1.72 dollar to pay off its current liabilities of $1 as compared to 2016 where the company’s current ratio was 2.07. So, it shows that company’s current ratio has improved significantly and has reached to the level of industry’s average which is 1.76. It is a good sign for the company. The company’s quick asset ratio has decreased from 2006 by 0.07 times, in 2016 it was 0.27 whereas in 2017 it is 0.20. It means that liabilities have increased but assets have not been increased in the same ratio. The industry average for this ratio is 0.78. It shows that the company needs to increase its quick assets to maintain a good liquidity position.
Inventory turnover ratio = Cost of goods sold / average inventory
Inventory turnover period = 365 / Inventory turnover ratio
Particulars | 2007 |
Cost of goods sold | 376,733 |
Cost of goods sold | 376,733 |
Opening inventory | 135,021 |
Closing inventory | 159,880 |
Average inventory | 147,451 |
Inventory turnover ratio | 2.55 |
Inventory turnover (in days) | 142.86 |
Whether super cheap to borrow more money for expansion or not depends upon various factors. Some of them are discussed below:
In the current situation, we observed that since with little borrowings, the company’s profit has increased by almost 35% as compared to last year. It shows that there are growth opportunities available in the market. Now, the company needs to check the cost of borrowings, if the cost of debt is less than the cos of equity, then company should borrow the money to expand further.
Price earning ratio = Market Value per share / Earnings per share
= 4.50/21
= 0.214 times
The company’s PE ratio for 2007 is 0.214 times whereas the industry average is 16.70 times. It shows that the company’s shares are undervalued in the market. In books, they are showing a value of $21 whereas in market these are at $4.50.
Dividend yield ratio shows the dividend in comparison to its market price. It is calculated as,
Dividend Yield Ratio = Dividend Per share / Market Price per share
= 10.5 / 4.50
= 2.33 %
Dividend yield ratio shows that how much an investor is getting with an investment of $1. For 217, the dividend yield ratio is 2.33 % which means that an investor is getting $2.33 against $1 invested in the business. The sector average for this ratio is 3.7%. This shows that the company should improve its dividend yield further.
The benefit of reading financials by the shareholder is to make the long term investment decisions and to gain the overall information about the company so that they can take decisions as to they want to stay invested in the company or not. Further, it helps in analyzing the growth prospects in their investments.
The limitation of this source of information is that the most of the shareholders are individual retail investors with minimal knowledge of accounts/ financials. This might result in improper understanding of results which might create chaos in their minds. Further, the financials can be window dressed by the management, so they might not reflect the true picture of the company.
Investors / Lenders are those peoples who have provided the money for running business to the company, so they always remain concerned about their money. That’s why they need financials to check the health of the company. They require the information to check the following:
The benefit of reading financials is to check the performance and profitability of the company and to ascertain the safety of finance prided by them and can decide whether to lend the funds to the company or not. Further, the covenants on which loan was provided to the company are getting fulfilled or not. As in the case of breach of covenants the lenders are eligible to take the money back from the company.
The limitation of this source of information is that the financials can be window dressed by the management and might not reflect the true picture of the business. Further, non-financials events are not covered by the financials and thus, the readers might not be able to know about these facts.
Dividend declared, not yet paid.
No matter how close the deadline is, you will find quick solutions for your urgent assignments.
All assessments are written by experts based on research and credible sources. It also quality-approved by editors and proofreaders.
Our team consists of writers and PhD scholars with profound knowledge in their subject of study and deliver A+ quality solution.
We offer academic help services for a wide array of subjects.
We care about our students and guarantee the best price in the market to help them avail top academic services that fit any budget.
15,000+ happy customers and counting!