Question

Company Z have the Financial Ratios as below:

Current Ratio=1.6

Quick Ratio=1.4

Average Industry Financial Ratios are given as below:

Current Ratio=1.5

Quick Ratio=0.9

Required:

Compare the Company Z's financial ratios with the average industry financial ratios and analysis Company Z's performance.

Answer 1

	Company Z	Industry
Current Ratio	1.6	1.5
Quick Ratio	1.4	0.9

 

1. Current Ratio

Meaning

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. A current ratio that is in line with the industry average or slightly higher is generally considered acceptable. A current ratio that is lower than the industry average may indicate a higher risk of distress or default.

Comparison

The Current Ratio of Company Z is 1.6 Which is Slightly higher than the industry ratio i.e 1.5. A current ratio that is in line with the industry average or slightly higher is generally considered acceptable. Hence, it is a good indicator for Company Z and that Company Z's ability to pay its short-term obligations Effectively and efficiently.

 

 

2. Quick Ratio

Meaning

Quick ratio, also known as the acid test ratio measure the ability of the company to repay the short term debts with the help of the most liquid assets and it is calculated by adding total cash and equivalents, accounts receivable and the marketable investments of the company and then dividing it by its total current liabilities.

 

Comparison

 The Quick Ratio of Company Z i.e 1.4  is much higher than industry Average of 0.9.

A quick ratio that is greater than the industry average may suggest that the company Z is investing too many resources in the working capital of the business which may more profitably be used elsewhere.