Question

Demonstrate a sophisticated awareness of ratio analyses and their relevance to the company’s financial health. Just pick a few and explain how they relate to the company’s health.

		2017		2016
Current Ratio (Working Capital)		5.78		5.18
Quick Ratio		4.89		4.60
A/R Turnover		5.91		5.53

Answer 1

Ratio Analysis:

Current ratio is the measurement of entity's ability to repay short term obligations (current liabilities) by realising current assets with in one accounting period, in 2016 current ratio was 5.18 : 1 and in 2017 current ratio is 5.78 : 1 which clearly indicative of better financial ability (liquidity position), this is also known as liquidity ratio.

Quick ratio is the measure of entity's ability to repay short term obligations (current liabilities) by realising cash and quick assets like debtors..etc with in one accounting period, in 2016 quick ratio was 4.60:1 and in 2017 quick ratio is 4.89:1, which indicates better liquidity position and major portion of current assets consists of cash and quick asset leads to huge quick ratio.

Accounts receivable turnover ratio is calculated by dividing net sales of the entity with average accounts receivable. Higher accounts receivable turnover is an indication that your business is effective at collecting credit from customers, in 2016 accounts receivable turnover was 5.53 times and in 2017 accounts receivable turnover is 5.91, which indicates in 2017 the entity is good at collecting credit from customers. (Assuming that net sales in 2017 are not fallen)