Liquidity ratio

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Liquidity ratio

  1. 1. BY: JYOTSNA KUMARI REG NO: 1261333028
  2. 2. LIQUIDITY RATIO  Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations. These ratios measure the ability of a company to pay off its short-term liabilities when they fall due.  The liquidity ratios are a result of dividing cash and other liquid assets by the short term borrowings & current liabilities.  The ratios under liquidity ratio are:  Current ratio  Quick ratio  Absolute liquid ratio  Inventory to working capital ratio
  3. 3. CURRENT RATIO  An indication of a company's ability to meet short-term debt obligations.  Higher the ratio the more liquid the company is.  If current assets are more than twice of the current liabilities then it is considered to have good short term financial strength and if current liabilities exceed current assets then company may have problem to meet its short term obligations.  Formula:  Current ratio=Current assets/Current liabilities
  4. 4. Year Current Assets Current Liabilities Current ratio 2011 1333.03 2216.96 0.601 2010 1094.70 1751.61 0.624 2009 903.36 1501.18 0.601 2008 836.86 1259.75 0.664 2007 678.69 1027.31 0.660
  5. 5. GRAPHICAL REPRESENTATION 0.56 0.58 0.6 0.62 0.64 0.66 0.68 2011 2010 2009 2008 2007 currentratio current ratio
  6. 6. INTERPRETATION  To measure whether or not a company has enough resources to pay its debt over the next business cycle, I have calculated the Current Ratio, which shows a fluctuating trend of 0.60 in 2011 then 0.62 in 2010 and finally a slowdown from 0.66 in 2008 to 0.60 in 2009.Though the general rule is a company should have neither more nor less liquidity rather a company should always have sufficient liquidity and as we know that the Thumb Rule is 2:1 but the calculated Current Ratios show an in-sufficient liquidity.
  7. 7. QUICK RATIO  Measure of a company's liquidity and ability to meet its obligations.  Also referred to as acid-test ratio and Liquid Asset ratio.  Liquid asset means all current asset except closing stock and prepaid expenses.  Formula: quick ratio = liquid assets/current liabilities.
  8. 8. Year Liquid Assets Current Liabilities Quick ratio 2011 598.99 2216.96 0.270 2010 518.75 1751.61 0.296 2009 404.62 1501.18 0.269 2008 401.95 1259.75 0.319 2007 277.47 1027.31 0c.270
  9. 9. GRAPHICAL REPRESENTATION 0.24 0.25 0.26 0.27 0.28 0.29 0.3 0.31 0.32 0.33 2011 2010 2009 2008 2007 quickratio quickratio
  10. 10. INTERPRETATION  We have also calculated Quick Ratios to show a fluctuating trend and a decline at the end of the year 2011. Though, the thumb rule is that companies with a quick ratio of greater than 1.0 are sufficiently able to meet their short-term liabilities but here the company has low Quick Ratio indicating the company’s liquidity position is not good enough
  11. 11. ABSOLUTE LIQUID RATIO  In addition to computing current and quick ratio, some analysts also compute absolute liquid ratio to test the liquidity of the business.  Absolute liquid ratio is computed by dividing the absolute liquid assets by current liabilities.  Formula: absolute liquid ratio = absolute liquid assets/current liabilities.
  12. 12. Year Absolute Liquid Assets Current Liabilities Absolute Liquid ratio 2011 227.21 2216.96 0.1024 2010 255.29 1751.61 0.1457 2009 155.59 1501.18 0.1036 2008 193.69 1259.75 0.1537 2007 37.76 1027.31 0.0367
  13. 13. GRAPHICAL REPRESENTATION 0 0.02 0.04 0.06 0.08 0.1 0.12 0.14 0.16 0.18 2011 2010 2009 2008 2007 absl.Liquid ratio absl.Liquid ratio
  14. 14. INTERPRETATION  To check whether the liquidity position of the company is good or not we have also calculated absolute liquid ratio and as we can see in every year the absolute liquid ratio is lower than the thumb rule that is 1:2, so the company’s liquidity position isn’t good.
  15. 15. INVENTORY TO WORKING CAPITAL RATIO  Working capital is known as excess of current assets over current liabilities.  Formula: Inventory to working capital ratio =Inventory/working capital
  16. 16. INVENTORY TO WORKING CAPITAL RATIO YEAR Inventory Working capital Inventory to working capital ratio 2011 734.04 -883.93 -83.04277488 2010 575.95 -656.91 -87.67563289 2009 498.74 -597.82 -83.42644943 2008 434.91 -422.82 -102.8593728 2007 401.22 -348.61 -115.0913628
  17. 17. -140 -120 -100 -80 -60 -40 -20 0 2011 2010 2009 2008 2007 Inventory toworking capital ratio inventoryto w.c ratio
  18. 18. INTERPRETATION The company total liabilities is greater than the total assets. So the working capital we are getting is in negative terms. So the organisations performance is not good due to the lesser assets.
  19. 19. FINDINGS  In current ratio, we have to find out current asets and the current liabilities. In 2008, it is the highest as compared to other years. But it remains same in 2009 and 2011.  In quick ratio, we have to find out liquid assets and current liabilities. In 2008, it is highest as compared to other years . But it is lowest in 2007 and the ratio is showing average in 2009, 2010 and 2011
  20. 20. Cont……  In absolute liquid ratio, we need to find out theabsolute liquid assets and current liabilities. In 2008 , it is highest as compared to the other years. It is average in 2011,2010,2009 and lowest in 2007  In inventory to working capital ratio, we need to find out the working capital which requires current assets value and current liabilities value. and inventory or closing stock. As, current liabilities exceeds current assets, so it is showing negative terms in all years.

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