Financial Ratios Interpretation: Liquidity ratios

Current Ratio The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations. The standard set for current ratio is usually 2 (2 units of current assets for 1 unit of current liability). The current ratio for the Saritow Spinning Mills Ltd has fluctuated throughout the last five years but has been mainly around 0.80:1 (0.80 unit of current asset for 1 unit of current liability). The current ratio of 0.91 in 2006 was way below the standard value and also below the industry current ratio which was 1.08 in 2006. In 2007 the industry current ratio increased by 0.02 while the firms current ratio decreased significantly and was 0.87. In 2008 the firm recovered and its current ratio jumped back to 0.97 while industrys current ratio was gradually increasing and had increased by 0.01 since 2007. But in 2009 both the industry and firms current ratio decrease significantly the industrys current ratio of 0.86 decreased relatively more in relation to the firms 0.69. After the decrease observed in 2009 the current ratios have steadily increased again to a level of 0.93 and 0.79 for industry and firm respectively in 2010. Though the firms current ratio has been weak by the standard of 2:1 it is not very good for a company operating in textile industry of Pakistan as it is consistent mostly with current ratios little below from the industry. Acid-test Ratio or Quick ratio It is a strict indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities. The standard set for acid test ratio is 1.5:1 (1.5 units of current assetsprepayments and inventory for 1 current liability. Firms quick ratio of 0.42 is lower than the industry average ratio of 0.46 during the year 2006 but in 2007 it increased to 0.57 while industrys ratio remain pretty much the same. In 2008 firms quick ratio increase further to a mere 0.59 (while industrys ratio was consistent around 0.46 like the prior two years) which shows the firms have ability to cover its current liabilities in the context of the industry. 2009 saw a dip in the quick ratio for the firm which slid down to 0.52 but it was relatively stable against the industry standard which fell from 0.46 to a meekly s 0.29 in just a year. In 2010 both the textile industrys quick ratio was recovered to 0.30 but Saritow Spinning Millss dropdown to 0.4395 but still the ratios produce a very weak liquidity position of the firms just like the current ratio suggested. Absolute Liquid Ratio or Cash Ratio The best indicator of a firms liquidity while looking at it from a conservative view is cash ratio. It indicates the immediate liquidity of the firm. The cash ratio of 0.01 for the year 2006 portray a very bad liquidity position for the firm but the ratio of 0.29 for the industry suggests that the firm is even not consistence with what is prevailing ratio for the whole industry. The cash ratios of 0.02, 0.02, 0.01, and 0.06 for the firm for the year 2007, 2008, 2009 and 2010 respectively suggest an awfully weak liquidity position due to low cash ratio. On the other hand the industrys cash ratio remained consistent for the years of 2007 and 2008 being 0.27 and 0.27 respectively but declined substantially in the years 2009 and 2010 to 0.04 and 0.05 which shows that the firms as well as industrys immediate liquidity position is in shambles in the recent years.