Reference no: EM13747238
The firm is just barely able to cover current liabilities with its current assets. A short-term creditor might find this a bit disconcerting and may reduce the likelihood that they would lend money to the company. The ratio should be compared to the industry - it's possible that this industry has a substantial amount of cash flow and that they can meet their current liabilities out of cash flow instead of relying solely on the liquidation of current assets that are on the books. Also, the CR for 2008 was .94, so the company has improved from the previous year.
The quick ratio is quite a bit lower than the current ratio, so inventory seems to be an important component of current assets.
This company carries a low cash balance, although the cash ratio has increased substantially from the previous year (.03 in 2008). This may be an indication that they are aggressively investing in assets that will provide higher returns. We need to make sure that we have enough cash to meet our obligations, but too much cash reduces the return earned by the company.
The Interval Measure indicates that the company can meet average daily expenses with current assets for almost 220 days. The Lecture Tip in the IM discusses the importance of this measure for entrepreneurs.
TE = total equity, and TA = total assets. The numerator in the total debt ratio could also be found by adding all of the current and long-term liabilities.
The firm finances almost 53% of its assets with debt. This is down from about 57% from the previous year.
Another way to compute the D/E ratio if you already have the total debt ratio:
D/E = Total debt ratio / (1 - total debt ratio) = .5261 / (1 - .5261) = 1.11
The EM is one of the ratios that is used in the Du Pont Identity as a measure of the firm's financial leverage.
The Long-term debt ratio is down from 33.49% in 2008.
Even though the company is financed with over 64% debt, they have a substantial amount of operating income available to cover the required interest payments.
Remember that depreciation is a non-cash deduction. A better indication of a firm's ability to meet interest payments may be to add back the depreciation to get an estimate of cash flow before taxes.
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