Liquidity(Current and Liquid) Ratio with Interpretations.

Liquidity Refers to the ability of a firm to meet the short term obligations/requirements as and when they arise.  Various liquidity ratios are available that measure the short term solvency or financial position of a firm.  These ratios are usually calculated to determine the short term paying of a concern or its ability to meet the current obligations. The various liquidity ratios are.


(a) Current Ratio
Current Ratio[Current Assets/Current Liabilities] is defines as the ratio/relationship between current assets and current liabilities.  Current Ratio is also called as 'Working Capital Ratio'.


Formula: 







Components: The Two major Components of current ratio are Current Assets and Current Liabilities.  
Current Assets include 
Cash in hand, 
Cash at bank, 
Short-term marketable securities, 
Short-term Investments, 
Bills receivable, 
Sundry Debtors, 
Inventories/Stocks, 
Work-In-Progress, 
Prepaid Expenses. 


Current Liabilities include 
Outstanding/accrued Expenses, 
Bills Payable, 
Sundry Creditors, 
Short-term Advances, 
Income-Tax Payable, 
Dividends payable, 
Bank Overdraft. 


Interpretation: Current Ratio indicates the amount of current assets owned by a firm for each current liability.  While interpreting the current ratio a standard [Ideal Ratio: 2:1] called as arbitrary standard of liquidity or banker's rule of thumb is considered.  If the result of the current ratio is greater than or equal to 2, then the firm is said to possess many current assets than its current liabilities, indicating good liquidity position of the firm. 

Significance: Current Ratio measured the Ability of the firm in meeting short term obligations.  Higher the ratio, greater the margin of safety to the ratio of creditors.  It also provides the ratio of the current assets and current liabilities. 

 (b) Liquid Ratio.
Liquid Ratio[(Current Assets - Inventory/Stock)/Current Liabilities] is defined as the ratio/relationship between the quick/liquid assets and current/liquid liabilities.  Liquid ratio is also called Quick Ratio or Acid Test Ratio.


Formula:



Components:  Liquid Ratio consists of two components, liquid assets and current liabilities.  Liquid assets are obtained by excluding stock from current assets.


Interpretation: While interpreting the Quick/Liquid Ratio, a standard [Ideal Ratio: 1:1] is taken as a rule of thumb.  A high liquid ratio indicates that the firm is liquid and has enough liquid assets to meet the liquid liabilities on time.

Significance: The quick ratio plays a vital role in measuring the liquidity position of a firm.  It measured the capacity of the firm to meet the current obligations  It is a more rigorous test of liquidity than the current ratio. A liquid ratio is usually used as a complementary to the current ratio.

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Limitations of Ratio Analysis?

Though Ratio analysis is a powerful tool for analyzing the financing position of a firm, it suffers from the following limitations.


a) As ratios are calculated based on the historical data or past performance, they may not necessarily  provide the correct information that is useful in decision-making.


b) As there are no particular standards or rules of thumb for all the ratios, it is difficult to interpret accurate results.


c) In order to draw correct interpretations, a single ratio may not be helpful.  For this purpose, a number of ratios are to be calculates which is likely to confuse the financial analyst than to help him in making any meaningful conclusions.


d) Changes in the accounting procedures by the firms may mislead the ratio analysis. For example, a change in the methods of valuation inventory from FIFO(First In First Out) to LIFO(Last In Last Out) increases the cost of sales and decreases the value of closing stock. This results in unfavorable Stock Turnover Ratio and Gross Profit Ratio.


e) In Inflationary conditions, the accounting data of several years cannot be compared and therefore analysis based on such data is not accurate.


f) As Ratio analysis is purely quantitative in nature, other aspects such as managerial efficiency, employee performance cannot be interpreted.


g) Comparison of ratios of one firm to the other in an industry is not possible due to their differences in sizes, accounting procedures etc.


h) As changes in price is not considered while calculating ratios, this may adversely affect the interpretations.


What is Ratio Analysis? Different types of Ratios?

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What is Ratio Analysis? Different types of Ratios?

Ratio Analysis are considered as a powerful tool among the various tools of financial statement analysis.  It facilitates a company in ascertaining its financial health i.e., its financial performance whether it is gaining profits or suffering losses.


Main Purpose of Ratio Analysis are in ascertaining the financial performance of a concern.
a)  Liquidity Ratio of Ratio Analysis, facilitates to identify whether the company has enough capability to meet short term obligations/requirements.  Current and Quick Ratios reveal  the comparison between Current Assets and Current Liabilities suggest for necessary decision making.


b) The Profitability Ratios like Gross Profit Ratio, Net Profit Ratio and Operating Ratio give a picture of profitability position of the concern.


c) Long term solvency and the leverage ratios such as Debt-Equity Ratio and Interest Coverage Ratio convey a firms ability to meet the interest cost repayments schedules of its long-term obligations and show the proportions of debt and equity in financing of the firms.


d) Activity Ratios such as Inventory Turn Over Ratio, Debtor Turnover Ratio, Working Capital  Turnover Ratio measure the efficiency with which the resources of a firm have been employed.


Though Ratio analysis is a powerful tool for analyzing the financing position of a firm, it suffers from the following limitations.

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Largest/Biggest States in the world (Area, Population wise)

Largest/Biggest States in the world Area Wise

State/Country	Area (Sq.km)
Russia	17,075,000
Canada	9,946,139
China	9,561,000
USA	9,372,614
Brazil	8,511,965
Australia	7,682,300
India	3,287,263
Argentina	2,776,654
Kazakshtan	2,717,300
Sudan	2,505,813

Largest/Biggest States in the world Population Wise

 

State/Country	Populations (In. Millions)
China	1,264.5
India	1,002.1
USA	275.6
Indonesia	212.2
Brazil	170.1
Pakistan	150.6
Russia	145.2
Bangladesh	128.1
Japan	126.9
Nigeria	123.3

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Smallest States in the world (Area, Population wise)

Smallest States in the World Area Wise.

Name	Area (Sq.km)	Location
Vatican	0.44	Europe
Monaco	1.95	Europe
Nauru	21.10	South Pacific
Tuvalu	26.00	South Pacific
Liechtenstein	60.00	Europe
San Marino	61.00	Europe
Marshall Islands	151.00	Cathay pacific
St. Kits-Nevis	269.00	Caribbean
Maldives	298.00	Indian Ocean
Malta	316.00	Mediterranean

 Smallest States in the World Population Wise.

Name	Population	Location
Vatican City	900	Europe
Tuvalu	10,588	South Pacific
Nauru	10605	South Pacific
Belau	18467	West Pacific
San Marino	25061	Europe
Liechtenstein	32057	Europe
Monaco	32149	Europe
St.Kitts-Nevis	45000	Caribbean
Antigua and Barbuda	64246	Caribbean
Dominica	64881	Caribbean

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Boom in the Retail Sector of India.

India is said to be the “second most attractive destination” for Retail business among the thirty emerging markets globally.  Retailing is the last stage of Distribution process, 
where an interface is createdbetween the producer and the Individual consumer for personal consumption. Post-Liberalization period, Indian retail industry is growing at a rate of 30% per annum and provides has huge employment opportunities.   There is been an constant increase in the share of big players in the organized retail market, but still unorganized sector dominates with 96.5% share in the Retail Industry.

Organized sector are those, which carries the trading activities by licensed retailers which includes Branded stores, Specialty Stores, Supermarkets, Hyper mart, Shopping malls etc. On the other hand, unorganized sector consist of the traditional shops like Kirana stores, Convenience stores, general stores etc.

Retail sector is said to be the fastest growing sector in the Indian economy and India’s retail sector is the ninth largest retail market in the world, where the huge middle class population is attracting the global players to enter in to the country, and a 25% growth is expected in the organized sector annually.  There is been a growth of about 50-60% in small town and 35-40% in the large cities inorganized sector. The rising income levels, a rise in retailing through online shopping and global exposure has helped the leading industrial houses to enter into this market to serve the needs of the consumer.

A boom in the retail sector has helped the new players to explore new markets, but still huge challenges are faced.  The government has limited the Foreign Direct Investment (FDI) for 51% in the field of retail for any Single brand in a view to protect the small scale retailers and even delaying the FDI approvals. Due to this in the long run, it would affect the opportunities and Technological Innovations. The tax system in India differs from one state to another, which is forcing the organized sector to restrict them in expanding their business. A Uniform central tax system would be an ideal solution to get rid of this hindrance.

Another huge challenge faced by the organized retail sector is the lack of government initiatives is amendments in Labor Laws, Tenancy legislation etc. The Labor laws should be relaxed, where it’sdifficult to manage employees in the operations. A special clearance should be taken for extended working hours.  Laws pertaining to restriction of Inter-state flow of goods should be eased and the clearance of licenses and other regulations should be done quickly.

There is been an huge opportunities and challenges faced by the Organized retail in terms of Competition, government tax and FDI restriction,  and a huge domination from Unorganized sector.  In spite of that a huge transformation is witnessed in growth. Huge population and untapped retail industry has attracted the global retail giants to enter the market where the sector is expected to grow by 25% annually.

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