Abc Financial Analysis - Cash and Cash Equivalents

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- Liquidity ratios

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

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- Current ratio

The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. In the case of increasing in current ratio over a period of time, this may suggest improved liquidity of the company or a more conservative approach to working capital management. In contrast, what happened if the current ratios decrease? Take ABC’s current ratio for discussing. As we can see from table, the current ratio fell sharply from 0.83 to 0.74 between 2013 and 2014. A decreasing trend in the current ratio may suggest a deteriorating liquidity position of ABC company. This is a bad signal because the liquidity of the company became weaker. In this situation, the reason of the bad signal was about the increasing of current liability through 2013 to 2014 of company.

Current ratio must be analyzed in the context of the norms of a particular industry. Despite the decreasing of current ratio from 0.83 to 0.74, to compare 2013 with industry average, ABC’s ratios were bigger than the industry average (0.83 bigger than 0.81). However, in 2014, firm’s current ratio was 0.74 and it was smaller than industry average (0.81).

In the next year, if company wants to improve their current ratio, they should be paid off as often and as early as possible. It would decrease the level of current liabilities and therefore improve the current ratio. Early payments to creditors can save interest cost and earn discount which will have direct impact to the profits of the firm.

- Quick ratio

The quick ratio or the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash.

In general, the trend of ABC’s quick ratio went down. To be specific, quick ratio declined from 0.78 in 2003 to 0.70 in 2014. Low quick ratios generally suggest that a firm is over-leveraged, struggling to maintain or grow sales, paying bills too quickly or collecting receivables too slowly.

Acid test ratio must be assessed in the context of the specific industry. In the case of ABC, quick ratio was 0.78 in 2013 which higher than the industry average (0.75). But the bad signal happened in 2004, quick ratio of 2014 was lower than industry average. To be specific, 0.70 in 2014 was smaller than 0.75 of industry ratio. This shows the quick payment of company is weak. This demonstrated that ABC would not be able to repay all its debts by using its most liquid asset.

A recommendation for increasing quick ratio in the next year, company should more focus on control the proportion of inventory. In this case, if necessary, company should decrease the proportion of inventory in current asset. In other hand, they should collect receivable quickly.

- Activity ratios

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- Fixed asset turnover ratio

A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

From the figure, we can see that there was a slight change in this ratio in ABC company from 2013 to 2014. In 2013, the fixed assets turnover ratio was 2.13 which relatively below the industry average in 2015 (2.50). It indicates that the company used its fixed assets as not good as other firms in the industry. However, everything was changed in 2014. In this year, fixed assets turnover ratio increased slightly to 2.30 but still lower than the industry average. It’s a result of a declining ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets.. A lower fixed asset turnover ratio shows that the company hasn't been more effective in using the investment in fixed assets to generate revenues.

- Total assets turnover ratio

The asset turnover ratio is an efficiency ratio that measures a company's ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales.

The total asset turnover ratio calculates net sales as a percentage of assets to show how many sales are generated from each dollar of company assets. For instance, a ratio of .5 means that each dollar of assets generates 50 cents of sales.

The total asset turnover ratio is a general efficiency ratio that measures how efficiently a company uses all of its assets. This gives investors and creditors an idea of how a company is managed and uses its assets to produce products and sales.

Because of the huge fluctuations of fixed assets and sales in 2 years ABC company’s total assets turnover also had an unstable trend in this period.

Specifically, in 2013, it was 1.50 and be somewhat lower than the industry average, indicating that it is not generating enough sales given its total assets. However, in 2014, because the company restructured its capital and the sales had a dramatic improve, this ratio rose slightly to 1.60 but still lower than the industry average (1.80). A lower ratio means that the company wasn't used its assets efficiently and most likely have management or production problems.

- Leverage ratios

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- Debt to assets

The debt to assets ratio indicates the proportion of a company's assets that are being financed with debt In 2013 and 2014, the ratio was 0.37 and 0.38 respectively. The debt to total assets ratio tells us that approximately 37% of the corporation's assets are financed by