5.0 Liquidity and Solvency
5.1 Liquidity Risk
Liquidity of a company refers to the ability to satisfy the organization’s short-term obligations by applying assets most readily available to be converted into cash. The liquidity is measured using the liquidity ratios and the formulas are given below (Chapter 9: Financial Statement Analysis 12).
Current ratio = ( …show more content…
Examining Billabong’s capital structure from an absolute point of view, the considerable debt amount added in financial year 2013 could have an impact to the company’s ability to purchase long-term debt at favorable future rates. When funds will be required beyond the internally available cash, this means that the company has no choice but to result into the equity market. Increasing long-term debt may assist the free cash flow hypothesis, which states that bad decisions on investment are usually made when free cash flow is in large amounts (Collier, Grai, Haslitt, and McGowan