Accounting assignment question assistance

irishproduce

Hi folks,

I would love someones advice on this as I am at the end of the assignment.
I am reviewing the liquidity and solvency of a particular company. I am required to make observations.
I am happy enough with my work so far but one thing I know is significant and I can't get my head around is this.

This company has a very low current ratio of .67:1 and an acid test ratio of .20:1

The Gearing ratio however is just 15% (Down from 20% previous year) and debt to equity as expected is almost the same at 18%.
Interest cover is 8.5 times.

What by way of observation in the summary would go there?
Current obligations are (according to theory) risky but long term sustainability is very good...

Appreciate any help.
Thanks
irish

TiGeR KiNgS

irishproduce wrote: »

Hi folks,

I would love someones advice on this as I am at the end of the assignment.
I am reviewing the liquidity and solvency of a particular company. I am required to make observations.
I am happy enough with my work so far but one thing I know is significant and I can't get my head around is this.

This company has a very low current ratio of .67:1 and an acid test ratio of .20:1

The Gearing ratio however is just 15% (Down from 20% previous year) and debt to equity as expected is almost the same at 18%.
Interest cover is 8.5 times.

What by way of observation in the summary would go there?
Current obligations are (according to theory) risky but long term sustainability is very good...

Appreciate any help.
Thanks
irish

These ratios are meaningless without context - please give the industry, comparatives and company profile/setting.

smcgiff

yip, in certain industries (cash sales, little debtors) that current ratio would be fine.

As said above, context is important - and is probably the purpose of this exercise

irishproduce

Sorry for delay folks, been trying to manage work and complete more assignments. Thanks for taking the time to reply!

No information is given regarding the company. It is an opening assignment (first of two) so the objective I think is to make an assessment based on just the information given or to apply one's own inference to it.

TiGeR KiNgS

irishproduce wrote: »

Sorry for delay folks, been trying to manage work and complete more assignments. Thanks for taking the time to reply!

No information is given regarding the company. It is an opening assignment (first of two) so the objective I think is to make an assessment based on just the information given or to apply one's own inference to it.

In that case you go by typical results and you anserwed your own question.


'What by way of observation in the summary would go there?
Current obligations are (according to theory) risky but long term sustainability is very good...'

Gear up the company to 50% and introduce higher level of current assets to reach the typical 2:1 ratio CURRENT RATIO. This will give a normalised view of the company. Go from there really.

irishproduce

TiGeR KiNgS wrote: »

In that case you go by typical results and you anserwed your own question.


'What by way of observation in the summary would go there?
Current obligations are (according to theory) risky but long term sustainability is very good...'

Gear up the company to 50% and introduce higher level of current assets to reach the typical 2:1 ratio CURRENT RATIO. This will give a normalised view of the company. Go from there really.

Legend, thanks Tiger.
I will keep it simple. I thought my reckoning of it was too narrow.

irish

thomlin

Hi Op,

It might be an IT company they don't have high loans usually because they are regarded as high risk and also don't have many assets as they don't sell a physical product. They usually don't get loans of any substance till they have made a market presence if they haven't been successful in the Venture capital markets prior to that.

There could be other industries like this also that fit the same criteria.

At the end of the day the question is asking you what is your opinion of this company based on the information you can see but also what you've learned so far in accounting has taught you in making a judgement based on information presented and your own understanding of accounting.

I can't see the information you've been given but look at the balance sheet and cashflow if you've been given one see what stands out there look at the P&L is it up or down on previous etc.

These things will give you insight that you need to demonstrate to your lecturer, you'll never be 100% correct as you are making a judgement based on the information you've been given and on your own investigation work of the F/S etc.

Best of luck Tom

irishproduce

Below is the balance sheet folks.
I have finished it anyway, made some general observations regarding short term liquidity needing investigation, long term viability being good. Perhaps opportunity to take out loan due to the fact gearing is so low.
The question was around liquidity and solvency so it took in payables/ inventory days also.