3.

0 LIQUIDITY AND FINANCIAL STABILITY

3.1 Kontiki Finance Limited’s Liquidity and Financial Stability for

years 2017 and 2018

Liquidity Ratios

Liquidity ratio in accounting is used to analyze the ability of a company to pay off both
its current liabilities as they fall due as well as their long term liabilities as they become
current. Simply, these ratios show the cash levels of a company and the ability to turn
other assets into cash to pay off liabilities and other current obligations. Liquidity is not
only a measure of how much cash a business has but of how easy it will be for the
company to raise enough cash or turn assets into cash. Examples of liquidity ratios are
current ratios and quick ratios

Current Ratios

Current ratio in accounting is a liquidity and efficiency ratio that measures a firm’s ability
to pay off its short term liabilities with its current assets. It is an important measure of
liquidity because short term liabilities are due within the next year. In the analyzing
process, current ratio helps investors and creditors understand the liquidity of a company
and how easily that company will be able to pay off its current liabilities. The ratio
expresses a firm’s current debt in terms of current assets. For instance, 4 would mean that
the company has four times more current assets than current liabilities. According to
Kontiki Finance Limited, the years 2017 and 2018 were measured under liquidity ratios
using the current ratio formula. The current ratio for 2017 was 1.9:1 and 2018 was 1.13:1,
thus, the current ratio decreased by 0.06:1 from 2017 to 2018. This decline in ratio can be
attributable to an increase in short term debt, a decrease in current assets, or perhaps a
combination of both. Regardless of the reasons Kontiki Finance Limited has, a decline
simply means a reduced ability to generate cash. Even though a decline had occurred
from 2017 to 2018, Kontiki Finance Limited was still able to satisfy its short term
liabilities with its current assets. The current ratio for Kontiki Finance Limited is an
important measure of liquidity because its short term obligations are due within the next
year. Thus, the faster rolling of money via debtors will keep the current ratio in control.

Quick Ratios

Quick ratio in accounting is also one of the liquidity ratios used to gauge a company’s
liquidity. Quick ratios and current ratios are almost similar but different in a way that
quick ratio focuses more on liquid assets and so it gives a better review of how well a
business can pay off its obligations. According to Kontiki Finance Limited, the years
2017 and 2018 were measured under quick ratio. The quick ratio for 2017 was 0.80:1 and
2018 was 0.53:1, thus, these two years have ratios that are below 1 which indicated that
the company has more current liabilities then current assets and that the company is in
financial distress. The quick ratios are in more distress because it has decreased from
0.80:1 to 0.53:1 by 0.27:1. The decline in this ratio is an indication that Kontiki Finance
Limited has more current liabilities than current assets. The company was not able to
meet its immediate obligations with its quick assets. One way in which Kontiki Finance
Limited can improve its quick ratios are by improving on the invoice collection period.
By reducing the collection period of accounts receivable, they will have a direct and
positive impact on the company’s quick ratio, thus, boost their incoming cash flow.

Financial Ratios

Financial ratio in accounting is a way to evaluate a company’s performance. For instance,

comparing Kontiki Finance Limited to other similar company’s in the same industry.
This ratio analysis evaluates the performance of the financial health of a company.
Examples of financial ratios are debt ratio and equity ratio.

Debt Ratios

Debt ratio in accounting is a solvency ratio that measures a firm’s total liabilities as a
percentage of its total assets. It simply measures the proportion of assets paid for with
debt. In accordance with Kontiki Finance Limited, the years 2017 and 2018 were
measured under debt ratio. The debt ratio percentage for 2017 was 88% and for 2018 it
was 87%, thus, the debt ratio percentage has decreased by 1% from 2017 to 2018. The
decline in this ratio does not have an impact because the debt ratio for both of the years
are above 60% meaning that a higher debt ratio means makes it more difficult for Kontiki
Finance Limited to borrow money and is considered to be unhealthy.in order to improve
debt ratio, the company needs to have a ratio of 40% and lower. One way to improve the
debt ratio is by implementing a debt swap which involves making a debt holder an equity
shareholder in the company. When this happens, the debt that is owed to the company is
cancelled.

Equity Ratios

Equity ratio in accounting is a financial ratio used to measure the proportion of owner’s
interest to finance the assets of the company which indicates the proportion of the
owner’s funds to total fund interested in the business. In accordance with Kontiki Finance
Limited, the years 2017 and 2018 were measured under equity ratio. The equity ratio
percentage for 2017 was 12% and 2018 was 13%, thus, the equity ratio percentage
increased by 1% from 2017 to 2018. The increase in this ratio does not have a great
impact on the company because the measures for both years are below 50% meaning that
there are more risks and less financial strength of the company. In order for Kontiki
Finance Limited to improve its equity ratio, they must improve on asset turnover by
having more sales relative to its assets. Once this is done, the company would be
profitable and earn higher returns on equity.

3.2 Kinetic Growth Fund Limited’s Liquidity and Financial Stability for years 2017
and 2018

Liquidity Ratios

Current Ratios
According to Kinetic Growth Fund Limited, the years 2017 and 2018 were measured
under liquidity ratios using the current ratio formula. The current ratio for 2017 was
3.01:1 and 2018 was 1.52:1, thus, the current ratio decreased by 1.49:1 from 2017 to
2018. This decline in ratio can be attributable to an increase in short term debt, a decrease
in current assets, or perhaps a combination of both. Regardless of the reasons Kinetic
Growth Fund Limited has, a decline simply means a reduced ability to generate cash.
Even though a decline had occurred from 2017 to 2018, Kinetic Growth Fund Limited
was still able to satisfy its short term liabilities with its current assets. Not only does the
current ratio depend on current assets but current liabilities as well. They should be paid
off as early as possible to decrease the level of current liabilities and therefore improve
current ratios.

Quick Ratios

According to Kinetic Growth Fund Limited, the years 2017 and 2018 were measured
under quick ratio. The quick ratio for 2017 was 3.01:1 and 2018 was 1.52:1, thus, these
two years have ratios that are below 1 which indicated that the company has more current
liabilities then current assets and that the company is in financial distress. The quick
ratios are in more distress because it has decreased from 3.01:1 to 1.52:1 by 1.49:1. The
decline in this ratio is an indication that Kontiki Finance Limited has more current
liabilities than current assets. The company was not able to meet its immediate
obligations with its quick assets. One way in which Kinetic Growth Fund Limited can
improve quick ratio is by increasing sales and inventory turnover. This means that if the
company sales are increased so will the inventory turnover be improved. Since cash is the
most liquid asset, the better the company is at increasing sales, the more cash will be
available for the company to meet its short term obligations.
Financial Ratios

Debt Ratios

In accordance with Kinetic Growth Fund Limited, the years 2017 and 2018 were
measured under debt ratio. The debt ratio percentage for 2017 was 8.47% and for 2018 it
was 10.68%, thus, the debt ratio percentage has increased by 2.21% from 2017 to 2018.
The increase in this ratio does not have an impact because the debt ratio for both of the
years are above 60% meaning that a higher debt ratio means makes it more difficult for
Kinetic Growth Fund Limited to borrow money and is considered to be unhealthy.in
order to improve debt ratio, the company needs to have a ratio of 40% and lower. One
way in which Kinetic Growth Fund Limited can improve debt ratio is by selling its assets
and then leases them back. However, when this happens, this will induce a cash flow that
can be used to pay off some debts.

Equity Ratios

In accordance with Kinetic Growth Fund Limited, the years 2017 and 2018 were
measured under equity ratio. The equity ratio percentage for 2017 was 38.64% and 2018
was 89%, thus, the equity ratio percentage increased by 50.36% from 2017 to 2018. The
increase in this ratio does not have a great impact on the company because the measures
for both years are below 50% meaning that there are more risks and less financial
strength of the company. In order for Kinetic Growth Fund Limited to improve its equity
ratio, they must increase profit margins by increasing profits relative to equity increase a
company’s return on equity. Increasing profits by selling more products, increasing prices
of each product sold and reducing its overhead expenses.