Financial Ratios Essay

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Pages: 4
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Liquidity ratios are the measure of how company pays its short term obligations and to meet the needs of the cash. The simplest ratio is the current ratio. This ratio expresses the relationship between current assets and current liabilities. The comparison of the ratio shows that for both 2009 and 2010, industry average is better than the brands Inc. There is also a decrease in the current ratio for both the industries. The decrease of value from 1.8 to 1.75 is not favorable for the company because it means that the company abilities started to decrease to pay its current liabilities with the current assets. However, the value increases to 1.9 in 2011. This change is favorable for the company because the abilities to pay short term obligations increase using current assets. The comparison with industrial competitors shows that the competitors are performing better than the company. However, the company’s performance is better overall which means company is growing over the years. Quick ratio is another indicator of paying the current liabilities with quick assets like cash and cash equivalent, accounts receivable and measurable securities. Ideal value of quick ratio is 1. Higher value indicates that company is keeping too much cash on hand or facing difficulties in receiving the accounts receivable. The comparison of the quick ratio for the years 2009, 2010 and 2011 shows that company was paying better in the initial years, but faced problems in 2010 may be because of not getting short term notes or accounts receivable. However, the value decreased in 2011 from 1.7 to 1.4 which is a huge change. In comparison with the industrial average, the company is much better in 2009 because there is a different of 0.3 which means competitors are weak in paying their short term obligations with quick assets. However, the performance of Brands Inc was poor in 2010 and the value of quick ratio became 1.7 that is 0.1 higher than the industry average. So, competitors are performing better than Brands Inc. in 2010. Company improved in 2011 and lowered the value of quick ratio to 1.4. The industrial competitors also performed better and all of them have same ratio which means all of them have the same abilities to pay their short term obligations or current liabilities with quick assets. This overall comparison shows that Brands Inc. performance is better than the other competitors of the industry. However, it needs more quick assets to pay its short term liabilities using quick assets. Inventory turnover is the efficiency ratio that measures the number of times an inventory is sold and replaced on average during the year. Low value of this ratio is an indication of inefficiency. In 2009, the inventory turnover of Brands Inc is 7.5 and industry average is 7. This means company is more efficient in selling and replacing its inventory than industry competitors. For 2010, this difference between averages of industrial competitors and Brands Inc increases to 1 which means the efficiency of the Brands Inc to sell and replace inventory is increasing rapidly as compare to the other industrial units. However, in 2011, the value of the inventory turnover for both industrial average and Brands Inc stabilize to 7.5. But, this value is not a good indication for Brands Inc because their efficiency decreases from 8
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