Question

Current Ratio	0.80	0.40	0.40
Quick/Acid-Test Ratio	0.85	0.42	0.43
Current cash debt coverage	0.20	0.09	0.11
Accounts Receivable Turnover	4.95	6.51	1.56
Inventory Turnover	102.67	52.21	50.46
Asset Turnover	4.04	5.09	1.05

The first column is for ratio in year 1, the second is for ratio in year 2, and the last one is the change(difference). What are the assessments of these ratios?

Answer 1

Current ratio is the coverage of current assets to repay the short term obligations that is current liabilities. There is decrease in current ratio which indicates decrease in current assets or increase in current liabilities and hence coverage has decreased. A lower current ratio indicates lower liquidity to repay short term obligations and is not viewed favourably by creditors. The minimum desired ratio is above 2.

The quick ratio is the coverage of quick assets –cash, marketable securities and accounts receivable to repay short term obligations. A decrease in quick assets or increase in current liabilities decreases the quick ratio. A decrease in quick ratio is not favourable for the firm it reduces its ability to repay the short term obligations. The desired ratio is above 1

A current cash debt coverage ratio is coverage of cash to repay current liabilities. A decrease represents lower cash availability to repay the current liabilities. The ratio can decrease with increase in current liabilities. A decrease in ratio is not favorable.

An increase in accounts receivable turnover ratio is favorable to the firm since it reduces the day sales on hand. An increase in accounts turnover ratio reduces the operating cycle period. Operating cycle period is time involved in conversion of raw material to finished goods and sale to consumers and final collection of cash from them. A lower operating cycle is favorable because it reduces the working capital requirements.

A decrease in inventory turnover ratio increases the operating cycle period. Increase in operating cycle requires more working capital and hence the ratio is not favorable to the firm.

An increase in asset turnover is favourable to the firm. Asset turnover ratio indicates the efficiency with which the assets are used in firm. The higher turnover ratio indicates the better efficiency of usage of assets to generate the revenue or turnover of the firm.