Question

LO1 15-1. (Risk-return trade-off) The balance sheet from 2011 to 2014 for Amaze Online Ltd., a consultancy firm, has been provided (figures in thousands) 2013 2014 2011 2012 $200 165 $365 $120 $100 150 $250 $100 Current assets $150 $130 Fixed assets 100 $250 $30 Total $230 $60 Current liabilities Long-term liabilities Owner's equity 60 50 40 80 185 $365 170 130 70 $250 $230 $250 Total Compute current and debt ratios for 4 years. b. What is your opinion of the company's liquidity and leverage? (Leverage usu- ally shows the share of liabilities in assets). Please note that in all 4 years, the company experienced an increase in net profit. c. What conclusions can you draw from the company's financial decisions in the last year? a.

Answer 1

	[$ in thousands]	2011	2012	2013	2014
a)	Current assets	$      150.00	$    130.00	$   100.00	$    200.00
	Current liabilities	$        30.00	$      60.00	$   100.00	$    120.00
	Current ratio [Current assets/Current liabilities]	5.00	2.17	1.00	1.67
b)	Total liabilities	$        80.00	$    100.00	$   180.00	$    180.00
	Total assets	$      250.00	$    230.00	$   250.00	$    365.00
	Total debt/Total assets	32.00%	43.48%	72.00%	49.32%
	Equity	$      170.00	$    130.00	$      70.00	$    185.00
	Debt/Equity ratio = Total debt/Equity =	0.47	0.77	2.57	0.97
	OPINION:
	The Company's liquidity position has deteriorated over the years. It was at a low of 1
	in 2013 and increased to 1.67 in the 2014. But still it is below the universal standard of
	2. If the ratio detriorates further, the firm will face liquidity problems.
	However, it is desirable to compare with industry standards.
	The financial leverage has increased greatly in 2013 and has been brought down to
	0.97 in 2014.
c)	The firm has been progressively using higher proportions of current liabilities which
	has resulted in lower current ratio and higher debt ratio/debt-equity ratio.
	This is not a good policy as higher current liabilities will result in greater short term
	liquidity problems though it may reduce interest costs and increase the net income.