N&S Finance Essay Example | Topics and Well Written Essays - 1000 words

N&S Finance - Essay Example Quick ratio Quick ratio, just as current ratio, is a measure of the company’s liquidity level, only that Quick ratio excludes inventory. This ratio is significantly below the current ratio, which could be an indication that the company is maintaining a high level of inventory. In case the company’s inventory is not easily convertible into liquid cash, then its financial position is at crossroads because it may experience difficulties paying its short-term creditors. The management should also consider whether the company is experiencing sales difficulties because that could be the reason why its inventory level is quite high. If this is the case, strategies should be crafted to increase conversion of inventory into cash so the liquidity could get better. Nonetheless, the positive increase from 0.83 to 0.95 is remarkable and if this trend continues, the company will not have liquidity problems. Accounts receivable turnover This ratio also shows the company’s liqui dity level. It is a strong indicator of how the management has efficiently employed the accounts receivable. A ratio of 6.63 in 2009 is remarkably big, meaning that collection of accounts receivable and extension of credit to customers was operated efficiently. Alternatively, this may indicate that the company operated, chiefly, on cash basis. The drastic fall of the ratio in 2010 could send alarm signals to the management that something is wrong especially if this sale is not as a result of a shift from cash sales to credit sales. For instance, this could imply that the debtors are servicing their dues very slowly or even defaulting. Average Collection period Average collection period reflects the period that it takes for the company to receive its accounts receivables. The 53.03 days for 2009 is an ideal period because the company will be assured of conversion of its receivables into cash in less time and use the money to pay its bills. However, 214.38 days for 2010 is very high, and this means that the company may be headed for liquidity problems as a result of customers delaying or defaulting on their dues. This, in turn, will cause cash shortage and hence the company may not be able to meet its administrative and operating expenses. The management should revise its debt collection policies to avoid experiencing liquidity problems. Inventory turnover The inventory turnover for 2009 is 6.5 times, but this reduced to 3.96 times in 2010. This implies that the company’s sales have started moving slowly, which is discouraging because this will most likely affect the profits directly. This, however, could be a sign that the company is increasing its inventory. Decline in inventory turnover will result to cash shortage and hence this trend should be averted. Total asset turnover Total asset turnover indicates how the management has invested the assets to generate revenue. The higher the ratio the better because it shows that the assets are applied more eff iciently. Reduction of this ratio from 0.93 in 2009 to 0.71 in 2010 is a cause for alarm because it indicates that the company’s assets are used less effectively, to generating income. The management should seek ways of boosting sales to ensure this ratio is restored to an optimum level. Debt to total assets Debt to total assets shows the company’s financial leverage, by revealing the proportion of the total assets that are funded by debt. In 2009, 47.14% of the assets were financed by creditors