Question

2015 2016 2017 2018

Current Ratio/working capital 3.67:1 5.1:1 3.5:1 4.15:1

Acid Test/Quick ratio 2:1 3.1:1 2.09:1 2.64:1

Gearing ratio 51% 35.00% 40.00% 41.00%

Please comments on liquidity and gearing by the above figures

Answer 1

	2015	2016	2017	2018
Current Ratio	3.67:1	5.1:1	3.5:1	4.15:1
Quick Ratio	2:1	3.1:1	2.09:1	2.64:1
Gearing Ratio	51%	35%	40%	41%

According to the above question, the above information is given.

Current ratio measures the liquidity of the company in terms of current assets and its current liabilities.

A higher current ratio is a sign that a company is sufficiently liquid and can easily pay off its current liabilities using its current assets. The company has a current ratio of 2.0, which would be considered a good ratio value in most industries. While the value of acceptable current ratios varies from industry, a good ratio would often be between 1.5 and 2.

From the above table, we can see that current ration in all these years are way more than 2 which means that if this ratio is too high then the company may not be using its current assets or short-term financing facilities efficiently. this may aslo means that there are problems in working capital management.

Quick ratio is a liquidity ratio which is used as a measure of the ability of the company to meet its current obligation.

A firm with ratio of 1:1 is considered to have sufficient liquidity however, a ratio of 4:1 is not as good as this means the business has 4 times idle current assets against the requirement of 1.

From the above table, we analysed that quick ratio has been increased from 2.1 in 2015 to 3.1 in 2016 and a high quick ratio generally means that a company is experiencing solid top-line growth, quickly converting receivables into cash, and easily able to cover its financial obligations. Also, the quick ratio has fallen down from 3.1 in 2016 to 2.09 in 2017 to 2.64 in 2018 and decline in this ratio means a reduced ability to generate cash.

Gearing ratio:This ratio shows the proportion of company's borrowed funds to it's equity.

Now,Let us understand what is good or bad gearing ratio for a company?

Ratio Higher than 50% is considered highly levered,

Ratio Between 25%-50% is considered optimal.

Ratio less than 25% considered low-risk by both investors and lenders.

With reference to the question-

A business with gearing ratio of 51% in 2015 is considered highly geared.

A business with gearing ratios of {35% in 2016}, {40% in 2017},{41% in 2018} are considered normal or optimal.