Liquidity Ratios and Activity Ratios

2.0FINANCIAL RATIOS 2 facile Ratios Liquidity ratios measure a business capacity to pay its debts as they come due. It overly measures the cooperatives ability to meet short-term obligations. Liquidity refers to the solvency of the firms overall monetary position the relaxation method with which it can pay its bills. Because a common precursor to financial distress and bankruptcy is low-down or declining liquidity, these ratios can get out early signs of cash flow problems and impending business failure. The dickens basic measures of liquidity are the real ratio and the immobile (acid test) ratio (Gitman, 2009). 1. Current ratios The menstruum ratio is current assets carve up by current liabilities. The current ratio measures the firms ability to convene its short-term obligations. However, this ratio does not dig the degree of liquidity of each component of current assets. In the other words, if current assets of a cooperative were mainly cash, they would be much more liquid than if comprised of mainly inventory ( utilise Financial Ratio Analysis,1995). Basically, the higher the current ratio, the more liquid is considered to be.

If the ratio is less than industry average, current liabilities exceed current assets; it will put the companies liquidity in threatened. Liquidity is in truth that in how much time the asset can be converted into cash. Figure 2.1 shows that current ratio for PJV was relatively low for 3 consecutive years from 2007, 2008 and 2009. The current ratio for 2007 was 0.6 and change magnitude to 0.75 in 2008. Although the liquidity rate is growing in deterrent example of 2009 to 0.78, it is still below industry average which was stood at 0.84. This is preponderantly due to the situation that the company has high current liabilities compared to current asset. The company recorded high current liabilities because they have cheering amount in trade creditor and bank borrowing accounts. heap creditor recorded at RM... If you want to get a near essay, order it on our website: Orderessay

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