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Solvency ratio indicates

Categories Economics, Finance

Essay, Pages 2 (479 words)

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Essay, Pages 2 (479 words)

The solvency
The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-term and long-term liabilities. The lower a company’s solvency ratio, the greater the probability that it will default on its debt obligations.

Current ratio
The ratio is mainly used to give an idea of the company’s ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations.

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A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt – as there are many ways to access financing – but it is definitely not a good sign. Current ratios for Sports UK

For year 2012

For year 2011

Acid test ratio
A stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory.

The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets. Acid test ratio for Sports UK

For year 2012

For year 2011

Performance ratio
Calculates a measure of a specific aspect of performance, which might involve
things which you can attach a number to, or an indicator that something did or did not happen in the requited way. Ratios are very good way to measure them using only a financial record.

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This record bellows shows performance of sports UK. 2011

Stock turn over= 72215 = 3.05 times
23611
2012
Stock turn over= 23611 x 365 = 119.3 days
72215
2011
debt collection period = 9024 x 365 = 962 days
34212
2012
debt collection period = 9098 x 365 = 904 days
36696

2012
asset turnover= 153487 = 0.64
237028

2011
asset turnover= 159921 = 0.73
219013

Profitability ratios
Measures that indicate how well a firm is performing in terms of its ability to generate profit. Those ratios measure financial metrics that are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor’s ratio or the same ratio from a previous period is indicative that the company is doing well. Profitability ratios of Sports UK for 2011

Gross profit margin =81272 x 100 =52.95
153487
Net profit percentage = 6741 x 100 = 43.9
153487

ROC E= 10753 x 100 = 21.9
49097

Profitability ratios of Sports UK for 2012
Gross profit margin =83199 x 100 =52.02
159921
Net profit percentage = 6742 x 100 = 39.0
159921

ROC E= 10310 x 100 = 20.9
49227

Cite this essay

Solvency ratio indicates. (2016, May 15). Retrieved from https://studymoose.com/solvency-ratio-indicates-essay

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