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Financial Stability Ratios Essay

The ability of the current assets and most liquid assets to cover the current liabilities deteriorated during the period. This outlines negative factors concerning the working capital management of the firm. However, in order to fully assess the liquidity of the organization it is important to apply specific ratios to certain elements present in the current assets and liabilities. These elements are normally the key variables of the working capital cycle. The average collection period remained stable during the years considered, but it is very low, which is expected for an airline company.

This shows an effective credit control department. The creditors payment period, which is the time take to pay the trade creditors increased during the years, which is a positive item for the liquidity of the firm. Further more, it is much higher than the average collection period, which means that the company is collecting the money from debtors before paying it up to creditors. This is very good for the cash flow of the firm. However, this increase in creditors payment period led to a higher balance at the financial year end.

As a result the amount of current liabilities increased leading to a decline in the current and

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quick ratios. The number of times stock is turned over as outlined by the inventory turnover ratio remained stable. Therefore this had no effect on the working capital problems noted above. The organization is a high-geared company as indicated by the gearing ratio. Such ratio outlines the proportion of debt capital to equity finance. Such gearing ratio is also increasing indicating a higher rise of debts in relation to equity.

Debt is normally an element of concern because it holds certain financial commitments like interest payments. However a high-geared company does not necessarily have a weak financial stability. In this respect, the interest cover ratio is adopted to further examine such element. This ratio indicates the ability of operating profit to cover interest expenditure. Such ratio slightly increased, which means that the profitability competence on such matter improved. Therefore one can state that the financial stability of the company is improving.

Principles of Working Capital Management The principles of working capital management rest upon ensuring a sound financial position. Such principles are the following: • Keep a good balance of cash and cash equivalents to meet short-term commitments; • Collect money on a time manner from trade debtors; • Pay creditors and other short-term payables on time; and • Ensure that a good balance of inventory is kept to meet customers demand, but such balance is not excessive leading to additional holding costs and money tied up in stock.

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