Liquidity: Long Term Liabilities Divided By Capital Balance Sheet

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4 (a)
Liquidity is A measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to do this. An appropriate radio that I would use to analyse the current strength of the balance sheet would be the current radio, using the balance sheet this bring a Current ratio of 0.75 (Current Assets divided by Current Liabilities), This is a low ratio, although this may not be an issue for the business as the income and cash inflows are relatively high. The strength of the business financial status may be weakened by the large overdraft the business has taken out; this may be a sign of poor financial management that may have to be looked at to avoid unnecessary large interest charges. Another radio that I may look at to analyse the current strength of the balance sheet would be the gearing ratio, using the formula (Long Term Liabilities Divided by Capital Employed) this comes out at 52.4% after the leaseback and the sale that may have meant paying back some of the loans, and paying off the overdraft, as this is over 50% high gearing could be an issue of the interest rates increase and the overdraft has not fully been paid off or there is still some outstanding loans. Overall liquidity ratios, the balance sheet looks to be strong as long as the overdraft and loans and suitably
4(b)
Ratio analysis for Premier Fuels is the Single most important technique of financial analysis in which quantities are converted into ratios for meaningful comparisons, with past ratios from previous balance sheets and ratios of competitors. Ratio analysis determines trends and exposes strengths or weaknesses of premier fuels balance sheet. Ratio analysis helps Premier Fuels determine the probability of being able to pay back the interest on the loan and overdraft and capital, this can help persuade the bank to allow another loan if they see there is low gearing or the liquidity levels are sufficient.
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