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Financial Statement Analysis - Case Study Example

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Financial Statement Analysis

This shows that the short-term financial position of Advance Auto Parts and Pep Boys is slightly better than that of AutoZone. While a low current ratio shows that the short term financial position is endangered, a very high current ratio would indicate idleness of working capital. It would mean that cash is not being utilized in an optimal way. For example, the excess cash might be better invested in equipment.
A current ratio can be improved by increasing current assets or by decreasing current liabilities. Acquiring a long-term loan instead of short-term debt, selling an idle or less useful fixed asset are some of the many ways of improving the current ratio.
The quick ratio (also called 'acid test ratio') indicates the liquidity of a business. The quick ratio looks only at a company's most liquid assets and compares them to current liabilities. It tests whether a business can meet its obligations even if adverse conditions occur. In general, quick ratios between 0.5 and 1 are considered satisfactory as long as the collection of receivables is not expected to slow. AutoZone has a very low quick ratio of 0.173 times. ...Show more

Summary

The current ratio is a reflection of the financial strength of a company. It is the number of times a company's current assets exceed its current liabilities, which is one of the indications of solvency of that business. It measures the ability of the business to pay its current liabilities.
Author : kmorissette
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