Simon Everly PLC Financial analysis and decision making Essay

Simon Everly PLC Financial analysis and decision making - Essay Example INTERPRETATION OF LIQUIDITY RATIOS Liquidity of an organization is its ability to meet its short term duties (obligations), and it is amongst the major measures of organizations’ financial health (Brigham & Ehrhardt 2011). The liquidity ratios for Simon Everly PLC determined in this task involved: Current Ratio and Acid Test Ratio. Interpretation of the Current Ratio This ratio shows the ability of an organization to pay its short liabilities using its short term Assets (Brigham & Ehrhardt 2011). Current ratios of orgainzations should be equal to or more one (1). If the ratio is either equal to one (1) or more than one (1), the organization is capable of satisfying its short term obligations using its current Assets (Brigham & Ehrhardt 2011). A current ratio that is less than 1 (one), on the other hand, means that cannot satisfy the needs of its short term liabilities, and therefore, is facing liquidity problems (Brigham & Ehrhardt 2011). Simon Everly’s Current Ratio Th e current ratios for the organization as of the 2011/12 and 2010/2011 financial years were shown in the below: Current Ratio as of 2011/12 Financial year was 1.72. Current Ratio as of 2010/11 Financial year was 1.94. ... This shows that even though the organization’s current ratio liquidity was more than one (1), it was on the down trend, and if proper actions are not taken on time the organization may be faced with liquidity problems in future. The consequences of this downward trend can be solved by the proposed strategy to obtain more funds for additional investments. Interpretation of the Acid Test Ratio The use of current ratio alone is not sufficient to determine liquidity for organisations since it involve certain current assets such as inventory that may be hard to convert to cash. Therefore, Acid test ratio which eliminates these assets (Assets that are difficult to convert into cash such as inventories) will give the real picture of the organization’s liquidity (financial health) (Thukaram 2007). Its interpretation is same as that of current ratio. That is, if it is more than one the organization is financially healthy in terms of liquidity and vice versa if it is less than on e (Thukaram 2007). Simon Everly’s Acid Test Ratio The Acid Test ratios for the organization as of the 2011/12 and 2010/2011 financial years were shown in the below: Acid Test Ratio as of 2011/12 Financial year was 0.9055 Acid Test Ratio as of 2010/11 Financial year was 1.19. While the Acid Test Ratio for 2010/11 Financial year was more than one (favourable, 1.19), the one for 2011/12 Financial year was less than one (unfavourable, 0.9055). This means the organization was able to meet the all obligations of short term liabilities using its current assets during the 2010/11 financial year. As of the financial year 2011/12 the organization’s liquidity was questionable. Therefore, necessary actions are required in order to improve the organization’s liquidity. It is suggested that the