Liquidation ratio Liquidity Ratio (LR) measures the short term solvency of the business. LR measures the ability of the business enterprise to meet its short term obligation as and when they are due. The liquidity ratios are also called the short- term solvency ratios. The most common ratios which measure the extent of liquidity or the lack of it are: a) Current ratio b) Cash Ratio The current ratio is defined as Current assets/ Current liabilities. In the year 2012, the current ratio is 1.04 while it increases to 1.11 in the year 2013. Current ratio of more than 1 shows adequate liquidity of the firm but it should be around 2. However, we can see that there is a minor increase in the current ratio but it is expected to rise more in future. …show more content…
Short term liabilities can be met either by cash or marketable securities. Cash can be better utilized in contingencies or can be used in business for very short term operational requirements. It is good for the business to use its large portion of cash for that purpose rather than to meet the creditors’ obligation. So the cash ratio of MCS is very poor and therefore it has to ensure increase in near future. Profitability Ratios Every business must earn sufficient profits to sustain the operations of the business and to fund expansion and growth and reward its shareholders. Profitability ratios are used to analysis the earning capacity of the business which is the outcome of utilization of resources employed in the business. There is a close relationship between the profit and the efficiency with which the resources employed in the business are utilized. Some important Profitability ratios are a) Net Profit …show more content…
In year 2012, it is -5% but in 2013, it is improved to 2%. Operating ration shows the operational efficiency of the business. A small value of operating ratio shows that MCS has to take care of its operational activities so further this ratio may be improved. Return on Equity (ROE) is defined as net profit/Total equity. This ratio shows how much company earned on the money of shareholders. In 2012, ROE is deeply negative at 44.4% but in 2013, it got significantly improved and touched 6.5%. However, it can’t be treated as a healthy figure but in comparison to profit margin or operating ratio, it is a respectable one. Return on Assets (ROA) is defined as net profit/total assets. This ratio shows the earnings on employed assets. Higher the ROA, more efficiently assets have been used. In 2012, it is -13.6% but in subsequent year 2013, it is improved to 1.6%. This ratio is also low and need serious attention. Long Term Debt paying ability Long term debt paying ability of firm is mainly measured by three ratios
The return on sales is the key profitability ratio. This ratio tells the analyst what proportion of the revenues ...
Current Ratio. The current ratio can indicate a company’s liquidity and is considered one of the most valuable ratios in analyzing
The Current Ratio is calculated by taking the current debt and dividing it by the current liabilities. It is the measurement on how a company can meet its short term liabilities with liquid assets (Loth, Rihar, 2015a).A higher ratio indicates favorable activity. A company should be able to meet it responsibilities with its
Return on equity (ROE) measures profitability from the stockholders perspective. The ROE is a calculation of the return earned on the common stockholders' investment in the firm. Generally, the higher this return, the better off the stockholders are. Harley Davidson's return on equity was 24.92% for 2001, 24.74% for 2000. They have sustained consistent, positive, returns for their shareholders for the past two years.
Cash ratio – Big drop (from .35 to .087) in year 2002. In 2003 the rate grew from .087 to .460. The reason of drop in 2002 is decreased in Cash and big increase in Liabilities. The increase in 2003 occurs because of big increase in Cash and slight increase in Liabilities.
Return on Asset (ROA) presents how efficient the management of the company is in creating profit from using all of the assets disposing. It is a helpful ratio to assess the performance of each company’s department as well as to perceive management performance over time.
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
By taking into account only the most liquid assets, ratio 1.0 in 2013 and 2012, which increased by a small margin 0.2 from 2011, indicates that company has strong liquidity position.
The liquidity position of a company can be evaluated using several ratios which evaluate short-term assets and liabilities and a firm’s ability to settle short-term debts (Gibson, 2011). These ratios can provide insight into a firm’s ability to repay its debts in the short term (Gibson, 2011). In turn they suggest a firm’s capacity for debt-satisfying capabilities into the future (Gibson, 2011). This paper will use financial statement data as cited in Gibson (2011) from 3M Company (3M) to better understand liquidity measures to evaluate a firm’s total liquidity position. The following paper will focus on various liquidity calculations, their meaning, and their interpretation relative to 3M. Finally, an overall view of 3M’s liquidity position will be evaluated. By analyzing a company using ratios, one can evaluate the effectiveness of its management and its strengths and weaknesses (Žager, Sačer, & Dečman, 2012).
Theoretical Concept: The current ratio gives a fare view to investors and creditors to understand the liquidity of a company how quickly a company is meets its short-term obligations to converted assets into cash. Let spouse if a company has current ratio is two it means a company has two rupees to pay its one rupee current liabilities. A higher current is more beneficial for a company as compare to lower ratio. The current ratio according to standard benchmark 1-2 is acceptable. The company has the current ratio equal or above 2 is much better performing it means that the company have 2 rupees to pay its 1 rupees of liability and still have 1 rupee to use for its day to day operations.
For the analysis, return on equity appraises how efficiently a firm can use the money from shareholders to generate profits and grow the company. Unlike other return on investment ratios, ROE is a profitability ratio from the investor's point of view which is not the company. More to the point, this ratio reckon how much money is produced based on the investors' investment in the company, not the company's investment in assets or something else. Higher ratios are almost always better than lower ratios, but have to be compared to other companies' ratios in the
The current ratio over the three years shows that the firm has no difficulties in paying short-term liabilities in time. At every year under consideration, the current ratio is above 1 (one) indicating the firm can pay the current liabilities with the current assets without using other sources such as debt
Ratio is very useful to for understanding the message of the financial statement. It helps to enlarge the financial health and reveals the performance of a business and makes it possible to forecast about future state of the business by studying the historical data.
The analysis of these ratios shows how Ford stands as a company for the past five years. Return on equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For long-term investing with great rewards, companies that have high return on equity ratios can provide the biggest payoffs. This ratio also tells investors how effectively their capital is being reinvested, so it is a good gauge of management's money handling skills. Ford is showing a considerable turn around in this area this past year, which could easily be due to changes in management. They are also reasonably following the industry in this area.
In conclusion a financial statement is very important to a firm to measure performance. A Financial statement includes income statement, balance sheet, and statement of cash flows. When reviewing a firm’s financial statement, a company uses three categories of ratios for the analysis of this finance statement and they are liquidity, profitability, and efficiency. In this essay I described the reason of the firm’s financial statements and why it is a very important to a