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Finance & Accounting
Pages 4 (1004 words)
Current Ratio The ability of a company to pay its short-term dues using the current assets is determined through the current ratio. A value of 1 to 2 is an acceptable range and, therefore, the company has maintained a healthy position with 1.06 in 2009 and 1.27 in 2010.
Quick ratio Quick ratio, just as current ratio, is a measure of the company’s liquidity level, only that Quick ratio excludes inventory. This ratio is significantly below the current ratio, which could be an indication that the company is maintaining a high level of inventory. In case the company’s inventory is not easily convertible into liquid cash, then its financial position is at crossroads because it may experience difficulties paying its short-term creditors. The management should also consider whether the company is experiencing sales difficulties because that could be the reason why its inventory level is quite high. If this is the case, strategies should be crafted to increase conversion of inventory into cash so the liquidity could get better. Nonetheless, the positive increase from 0.83 to 0.95 is remarkable and if this trend continues, the company will not have liquidity problems. Accounts receivable turnover This ratio also shows the company’s liquidity level. It is a strong indicator of how the management has efficiently employed the accounts receivable. A ratio of 6.63 in 2009 is remarkably big, meaning that collection of accounts receivable and extension of credit to customers was operated efficiently. Alternatively, this may indicate that the company operated, chiefly, on cash basis. ...
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