To understand the key decisive factor in working capital management with the help of liquidity ratios. Late Date 24 Oct 2012
Learning Outcome:
After going through this GDB, the student will be able to recognize the importance of working capital management.
The Case:
Eco Tyre Ltd. (ETL) – incorporated in year 2003 and entered into automobile tyre manufacturing business by introducing a new tire manufacturing technology. Over the years, ETL has been recognized as a tyre market leader. But, now a day, ETL is facing hard time due ineffective control of its working capital items.
Following data has been developed from its comparative balance sheets:
Ratio FY 2010 FY 2011
Current Ratio 0.60 Times 0.79 Times
Quick Ratio 0.45 Times 0.61 Times
Return on Asset 9.7% 12.5%
Inventory Turnover 28 Times 15 Times
Avg. Collection Period 13 Days 24 Days
Short-term Debt 4 million 4 million
Total Asset Turnover Ratio 2 Times 5 Times
Credit Sales to Cash Sales Ratio0.45 Times 0.67 Times
Required:
Being a financial analyst, do you think the liquidity of a company is satisfactory?
Idea Solution:
Liquidity of the company is not satisfactory short term debt.
It is unsatisfactory, since, the current ratio is also the liquidity ratio. As long as the current ratio is between 1.5-3 the company is good. However below 1 means that current liabilities are exceeding current assets.
Complete solution will be update as soon as possible
