Financial Analysis

The liquidity ratios indicate a firm's ability to carry out enough revenue in order to cover its obligations and continue its operations.

Liquidity is important for any firm as it is an assessment of the ability to pay its' liabilities in the short term. There are two main liquidity ratios: the current and the quick ratio. The current ratios divides the current assets by the current liabilities to assess how many times the current assets can pay the current liabilities (Elliott and Elliott, 2011). Traditional ratios are usually in the region of 1.5, but this may vary depending on the industry and nature of the business (Elliott and Elliott, 2011). The current ratio is shown in table 1.

Liquidity ratio lets us know whether the company is able to pay their short-term and long-term obligations. It measures how well the company can raise cash or convert assets into cash. Companies like to use this ratio to compare it against its competitors or industry average. Liquidity ratios include current ratio, quick ratio, and working capital.

The current ratio is a function of current assets divided by current liabilities and it is utilized to determine the health of working capital to meet short term financial responsibilities. If the current ratio is less than 2.0 it should be concerning to the company and the ability to pay short-term liabilities is in danger. In general, a current ratio of 2.0 or better means a positive probability that all short term liabilities will be met. However, the proper use of capital can become a cause for concern if the liquidity ratio is too high, meaning there are cash and assets laying around and not being put to good use. The current ratio for Nano-Brewery is 4.47. This indicates that although paying liabilities will not be an issue, there may be better ways for Nano-Brewery to leverage their available assets.

Current Ratio “To calculate the current ratio, we divide current assets by current liabilities. More liquidity is better because it means that the firm has a greater ability, at least in the short term, to make payments” (Parrino, Kidwell, & Bates, 2012).

This ratio is similar to current ratio, except that it excludes inventory from current assets. Inventory is subtracted because it is considered to be less liquid than other current assets, that is, it cannot be easily used to pay for the company’s current liabilities. A company having a quick ratio of at least 1.0, is considered to be financially stable. It has sufficient liquid assets and hence, it will be able to pay back its debts easily (Qasim Saleem et al., 2011).

Liquidity ratios are the measure of a company’s ability to meet its short term liabilities by converting its assets into cash without losing value. The results of the liquidity ratios depend on the outcome of Current ratio and quick ratio. In the appendix-I, in 2011 Target had better Current ratio

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These ratios are computed to judge the short term liquidity of the business. Two most important liquidity ratios are current ratio and quick ratio. These ratios determine the ability of firm to meets its current liabilities out of its current/quick assets.

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These ratios help company in determining its capability to pay short-term debts. Liquidity ratios inform about, how quickly a firm can obtain cash by liquidating its current assets in order to pay its liabilities. General liquidity ratios are: current ratio and quick ratio. Current ration can be obtain by dividing company’s current assets by its’ current liabilities. Generally a current ratio of two is considered as good (Cleverley et al., 2011). Quick ratio also known as acid test determines company’s liabilities that need to be fulfilled on urgent basis. Quick ratio can be obtained by dividing quick assets by current liabilities. Quick ratio is considered as stricter because it excludes inventories from current assets. Generally a quick ratio of 1:1 is considered as good for the company. Higher quick

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Current Ratio: Current ratio measures if a company has enough resources to meet its short-term obligations. It shows the proportion of current assets in relation to its current liabilities. The higher the ratio, the more liquid the company is. The ideal current ratio is 2 for most enterprises. 1.5 is also an acceptable ratio. Current ratio being under 1 indicates that company is having difficulties and unable to meet its liabilities, making the company “illiquid”.

It is also called as the acid test ratio, this measures immediate liquidation ability of a company. The quick ratio of a healthy company should be 1 or higher. It is more reliable than the Current ration because inventory, prepaid expenses, and other less liquid current assets are excluded from the calculation. The quick ratio for UPS has remained relatively consistent over the past five years with no more than a 0.41 change and the high is at 1.65 with a low of 1.24. It shows that UPS has a very strong ability to meet its short-term obligation.