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Statement of Smith Ltd - Essay Example
Finance & Accounting
Pages 2 (502 words)
The liquidity ratios are an area of main interest to creditors and investors as it determines the overall liquidity of a company in terms of business short-term solvency thus,its ability to pay back its debts as it runs its business operations. …
According to the annual financial reports of Smith Company the year 2012, the current ratio recorded was 1.6 (Warren, Reeve, & Duchac, 2012).. This clearly indicates that the firm’s ability to meet its short-term obligations with time has improved thus, the firm remains liquid and has the ability to meet its short-term financial obligations within a short duration of time. As a result, it is wise to invest in the company has an high current ratio points out a progress in asset management that allows movement of cash flow thus enhances growth and prosperity. In addition, quick ratio is used as an analytical tool that indicates the firm’s ability to pay debts it shows the difference in liquidity between account receivables and inventory. This is because most of the companies provide services and goods to its customers on credit basis as they mostly allow favourable credit terms. Smith Company reports a quick ratio of 0.66, this shows that the company has enough current assets apart from inventories to enable it pay for its short-term obligations as and when they fall due.
Leverage ratios are used by companies to calculate the firm’s ability to finance its obligation and its ability to generate income that can service the debts and interest rates accrued as the company meet its financial obligations over time. ...
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