## The Industrial Average Liquidity Ratios

08-03-16 0 comment

The Industrial Average Liquidity Ratios

1. Liquidity ratios:

Liquidity ratios are used to provide information on a company’s ability to meet its short-term, immediate obligations.Liquidity ratios represent the ability of the company to meet its short-term obligations using assets that are most readily convertible into cash.

 No. Liquidity Ratios 1. Current ratio  =  current assets Current liabilities Current ratio indicates the company’s ability to cater for its current liabilities with its current assets. Year 2011 2012 =  501,192     157,453 =3.183 =  546,607     186,852     =2.925 Explanation: The ability of the company to pay its current liabilities in 2011 was more than that of 2012 since the current ratio was high in 2011 than in 2012. 2 Quick ratio =   current assets-Inventory Current liabilities The quick ratio is used to show the ability of the company to cover its current liabilities with its most liquid assets. =  501,192-8,913        157,453 =3.127 =   546,607-11,096        186,852     =2.867 Explanation: Since the quick ratio of the company in 2011 was more than that of 2012, it means that the company had more liquid assets in 2011 which could be used to cover the claims of the short-term creditors in a period roughly corresponding to the maturity of the liabilities.
 No. Liquidity Ratios 1. Current ratio  =  current assets Current liabilities Year 2012 2013 = 546,607 186,852 = 2.925 =  666,307 199,228 =3.344 Explanation: The ability of the company to pay its current liabilities out of its current assets in 2013 was more than that of 2012 since the current ratio was high in 2013 than in 2012. When compared to 2011, the current ratio in 2013 was higher meaning the company had the most current assets which could cater for current liabilities in year 2013. 2 Quick ratio =   current assets- Inventory Current liabilities =  546,607-11,096 186,852 =2.866 =   666,307-13,044 199,228 = 3.279 Explanation: The quick ratio of the company in 2013 was more than that of 2012. This means that the company had more liquid assets in 2013 which could be used to cover the claims of the short-term creditors. When compared to 2011, the quick ratio of 2013 was more than that of 2011 meaning that the company had increased in the amount of its liquid assets and therefore could comfortably pay its current liabilities efficiently.

The industrial average Liquidity ratios are:

1. Current ratio: 2.5
2. Quick ratio: 2.3

Interpretation:

Since the company’s liquidity ratios(both current and quick ratios) are higher than the industrial liquidity ratios (both current and quick ratios), this means that the company will probably have better luck getting short term loans from lenders.

2.Efficiency Ratios.

The efficiency ratios measure how well assets of the company are utilized. They can be used to evaluate the benefits produced by specific assets, such as inventory or accounts receivables or by a company’s assets collectively. Efficiency ratios help in the evaluation of how effectively the company is putting its investment to work. The greater the turnover, the more effective the company is at producing a benefit from its investments in assets.

 No. Efficiency Ratios 1. Inventory turnover = Cost of goods sold  Inventory Inventory turnover indicates how many times the inventory is created and sold during the period. Year 2011 2012 =1,688,816 8,913 = 189.48 = 2,002,793 11,096 = 180.5 Explanation: It means that the inventory was created and sold 189.48 times in 2011 and 180.5 times in 2012. The inventory turnover in 2011 was higher in 2011 than in 2012 implying that inventory was created and sold more in 2011 than in 2012. 2 Total asset turnover =    Sales    Total assets The ratio indicates the extent that the investment in total assets results in sales. It actually measures the utilization of all the firm’s assets. =  3, 958, 364 1,425,308 = 2.78 =   4,734,017 1,668,667 = 2.84 Explanation: The ratios imply that the firm utilized its assets better in 2012 than in 2011 since it had a higher total asset turnover in 2012.
 No. Efficiency Ratios 1. Inventory turnover = Cost of goods sold Inventory It indicates how many times inventory is created and sold during the period. Year 2012 2013 =2,002,793 11,096 =180.45 =  2,375,333 13,044 = 182.10 Explanation: It means that the inventory was created and sold 180.45 times in 2012 and 182.10 times in 2013. The inventory turnover was higher in 2013 than in 2012 meaning that inventory created and sold more in 2013. When compared with 2011, the inventory turnover in 2011 was higher than that of 2013 postulating the company was more able to utilize its inventory through sales in 2011. 2 Total asset turnover =    Sales   Total assets =  4,734,017 1,668,667 = 2.837 =   5,589,924 2,009,280 = 2.782 Explanation: This means that the firm utilized its assets to generate sales better in 2012 than in 2013 since the turnover was higher in 2012 than in 2013. In comparison with 2011, the total asset turnover in 2011 was fairly equal to that in 2013.

The industrial total asset turnover is: 0.6

Interpretation:

• Since the company’s total asset turnover is more than the industrial asset turnover, this shows that the company is very effective in producing a benefit from its investments in assets.

3.Leverage ratios

They are used to assess how much risk the company has taken in financing its assets through debt and equity.

 No. Leverage Ratios 1. Total debts to assets ratio = Total Debt Total assets Total assets = Total debt + equity Year 2012 2013 =  422,741 1,668,667 = 1 4 =  0.25 =  470,992 2,009,280 = 23 100 = 0.23 Explanation: It means that the firm borrowed financial assistance more in 2012 than it did 2013.The proportion of debt financed by assets was higher in 2012. When compared with 2011, the total debts to assets ratio was higher in 2011 than it had in 2013.Hence the company had a higher proportion of debt financed by assets in 2011. 2. Total debt to equity ratio = Total debt Total shareholder’s equity =  422,741 1,245,926 = 17 50 = 0.34 =   470, 992 1,538,288 =  31 100 = 0.31 Explanation: This means that the company had acquired more debt and equity to finance its assets in 2012 than it did in 2013. When compared with 201

The Industrial Total debt to equity ratio is: 0.76

Interpretation:

• Since the company’s total debt to equity ratio is less than the industrial average, this means that the company is running at a favorable financial position since it is able to cover its debts adequately using the assets and equity it possesses.
1. Profitability Ratios.

The profitability ratios are used to provide information on the amount of income for each dollar of sales.They compare components of income with sales and are usually expressed in %.

 No. Profitability Ratios 1. Gross profit margin = Gross income Sales It indicates the total margin available to cover operating expenses and yield a profit. Year 2011 2012 =  2,269,548 *100 3,958,364 = 0.57*100 = 57% =  2,731,224 * 100 4,734,017     =0.58*100 = 58% Explanation: The gross profit margin in 2012 was greater than that of 2011 by 1% implying that there was more gross profit left to cater for operation expenses in 2012. 2 Net profit margin = Net income Sales Also known as return on sales. It indicates how much of each dollar of sales is left over after all expenses. =  214,945    * 100 3,958,364 = 0.05*100 = 5% =   278,000     * 100 4,734,017 =0.06 *100 = 6% Explanation: The net profit margin in 2012 was greater than that of 2011 by 1% meaning that more net profit left after all expenses had been paid in 2012 than in 2011.
 No. Profitability Ratios 1. Gross profit margin = Gross income  Sales Year 2012 2013 =  2,731,224  * 100 4,734,017 = 0.58 *100 = 58% =  3,214,591*100 5,589,924 = 0.58 * 100 = 58% Explanation: The gross profit margin in 2012 was relatively equal with that of 2011. When compared with 2011, the gross profit margin in 2013 was greater than that of 2011. 2 Net profit margin = Net income Sales =  278,000  *100 4,734,017 = 0.06*100 =6% =   327,438*100 5,589,924 = 0.06 *100 = 6% Explanation: The net profit margin in 2012 was relatively equal to that obtained in 2013 implying that the company obtained the net profit left after all expenses in both years. When compared to 2011, the net profit margin in 2013 was more than that of 2011 meaning that the company obtained a greater profit in 2013 after it had deducted all its expenses.

The industrialaverage are:

1. Net profit margin- 9.6%.
2. Gross profit margin- 68.98%

Interpretation:

• Since the gross profit margins are less than the industrial average gross profit margin, the company might not probably be running in a healthy financial position and measures should be taken to alleviate the margin.
• The company’s net profit margin is less than the industrial margin indicating that the company is probably not in a healthy financial position.