Essay about The Ratio Of A Company
These ratios are designed to provide information regarding the ability of a company to meet its short term commitments. Liquidity is crucial for the survival of an organisation.
Current Ratio- this ratio checks ability of the company to meet its short term debt. Current ratio is useful as it shows whether a company has adequate resources to repay short-term debt or if it will experience cash flow problems in the near term. A ratio of 2:1 is usually considered as a benchmark. A ratio of less than one suggests that the company may not have sufficient resources to settle its short-term debt obligations.
Sainsbury’s current asset is considerably less than current liability in both years. This can be due investment in fixed asset and joint venture. For every £1 liability they have 65 pence worth of asset to cover it.
This lower ratio compare to benchmark is due to investors’ confidence in Sainsbury’s brand like also lower number of trade receivables on the books compare to the trade payable number.
Quick Ratio- the quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash.
Supermarket industry have relatively low quick ratio as they hold only fast moving inventories of finished goods and all of those are made of cash. The higher ratio the more liquid the business is. However, too high current ratio is also not preferred as the resource could be use more…