Liquidity & company
The company’s liquidity exhibited an increasing trend for the years 2004 through 2006. From current ratio of 0. 68 in 2004, it increased to 0. 80 in 2005 and further increased to 1. 33 in 2006. Based on 1996, the latest available information, the company appeared to be capable to meeting its currently maturing obligations since a current ratio of more than 1. 0 would signify that its current assets are higher than its current liabilities with an excess of one third of the current assets.
The current ratio improvement in 2006 also assumed greater significance given the fact that profitability did not reflect an improvement from...
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... 2005 to 2006. What this change indicates is that the improvement in liquidity must have come from improved financial management in 2006. 2. 1. 3 Solvency and Gearing Ratios Debt assets ratios showed a slight deterioration from 0. 53 in 2004 to 0. 55 in 2005, but in 2006 there was a marked improvement after it registered at 0. 26.
Since debt asset ratios measure the amount of debts to total assets of the company, it may be stated that the company’ solvency had shown a significant improvement in 2006 which means that the company has shown a better long term health. This observed behavior appears consistent with its gearing ratio which exhibited deterioration in 2005 to 21. 89 from 17. 7 in 2004. However in 2006 there was a very big improvement in the debt equity ratios which means that the company has become less risky in 2006 compared to other two years.
The gearing ratio improvement in 2006 also assumed greater significance given the fact that profitability did not reflect an improvement from 2005 to 2006. What has been observed in the interesting improvement of liquidity as against lack of increase in profitability in 2006 may be said to be noticeable also in terms of gearing ratios. Similarly therefore, the improvement in solvency and gearing ratios must have come from better financial management in 2006 compared with previous years.