Liquidity Ratios
Liquidity ratios are an important class of financial metrics used to
determine a debtor's ability to pay off current debt obligations without
raising external capital. Liquidity ratios measure a company's ability to
pay debt obligations and its margin of safety through the calculation of
metrics including the current ratio and quick ratio.
Liquidity is the ability to convert assets into cash quickly and cheaply.
Liquidity ratios are most useful when they are used in comparative form.
This analysis may be internal or external. For example, internal analysis
regarding liquidity ratios involves using multiple accounting periods that
are reported using the same accounting methods. Comparing previous
periods to current operations allows analysts to track changes in the
business. In general, a higher liquidity ratio shows a company is more
liquid and has better coverage of outstanding debts.
Alternatively, external analysis involves comparing the liquidity ratios of
one company to another or an entire industry. This information is useful
to compare the company's strategic positioning to its competitors when
establishing benchmark goals. Liquidity ratio analysis may not be as
effective when looking across industries as various businesses require
different financing structures. Liquidity ratio analysis is less effective for
comparing businesses of different sizes in different geographical
locations.
Types of liquidity ratios
Current Ratio: The current ratio measures a company's ability to
pay off its current liabilities (payable within one year) with its
total current assets such as cash, accounts receivable,
and inventories. The higher the ratio, the better the company's
liquidity position:
Current Assets
Current Ratio = Current Liabilities
Calculation Table:
Year 2019 2020 2021 2022 2023
Current 8797062647 7792265725 7079762837 6442296779 6797631948
Assets
Current 8491404469 7358856780 6475754293 5580692221 6412653149
Liabilities
Ratio 1.060 1.154 1.093 1.059 1.036
Graphical Presentation
Line Chart
1.2
1.15
1.1
1.05
0.95
2019 2020 2021 2022 2023
Findings:
1. The current ratio has been gradually decreasing from 1.154 in
2020 to 1.036 in 2023.
2. This trend suggests a potential decline in the company's ability to
cover short-term obligations with its current assets over the years
Comments:
A current ratio above 1 is generally considered healthy. A consistent ratio
above 1 indicates the company can meet its short-term obligations. So,
The HBFC current ratio is reasonable but the declining trend suggests
the need for a more in-depth analysis of its financial health and
operational efficiency.
Quick Ratio: The quick ratio measures a company's ability to
meet its short-term obligations with its most liquid assets and
therefore excludes inventories from its current assets. It is also
known as the acid-test ratio:
Current Assets−Inventory− prepaid Expenses
Quick Ratio = Current Liabilities
Calculation Table:
Year 2019 2020 2021 2022 2023
Quick 922710134 1266560297 1179314640 1088737980 1071276742
Assets
Current 6412653149 5580692221 6475754293 7358856780 8491404469
Liabilities
Ratio 0.144 0.227 0.182 0.148 0.126
Graphical Presentation
Line Chart
0.25
0.2
0.15
0.1
0.05
0
2019 2020 2021 2022 2023
Findings:
1. The quick ratio has decreased from 0.144 in 2019 to 0.126 in
2023.
2. This trend suggests a potential deterioration in the company's
short-term liquidity over the years.
3. A quick ratio below 1 may indicate difficulties in meeting
immediate financial obligations without relying heavily on
inventory.
Comments:
1. Evaluate Working Capital Management: Assess and improve the
management of working capital, including receivables, payables,
and inventory, to enhance liquidity
2. Cost Control Measures: Implement cost control measures to
optimize expenses, ensuring that operational costs are aligned
with revenue and maintaining profitability.
3. Diversify Revenue Streams: Explore opportunities to diversify
revenue streams or expand product/service offerings to potentially
boost income and improve overall financial stability.
