MGT201-Financial Mnangement GDB

Ratio analysis Learning Objective: To understand the key decisive factor in working capital management with the help of liquidity ratios. Learning Outcome: After going through this GDB, the student will be able to recognize the importance of working capital management. The Case: Eco Tyre Ltd. (ETL) - incorporated in year 2003 and entered into automobile tyre manufacturing business by introducing a new tire manufacturing technology.  Over the years, ETL has been recognized as a tyre market leader. But, now a day, ETL is facing hard time due ineffective control of its working capital items. Following data has been developed from its comparative balance sheets: Ratio FY 2010 FY 2011 Current Ratio 0.60 Times 0.79 Times Quick Ratio 0.45 Times 0.61 Times Return on Asset 9.7% 12.5% Inventory Turnover 28 Times 15 Times Avg. Collection Period 13 Days 24 Days Short-term Debt 4 million 4 million Total Asset Turnover Ratio 2 Times 5 Times Credit Sales to Cash Sales Ratio 0.45 Times 0.67 Times Required: Being a financial analyst, do you think the liquidity of a company is satisfactory? Support your answer with logical reasoning.

Important Instructions: 1.       Your discussion must be based on logical facts. 2.       The GDB will remain open for 3 working days/ 72 hours. 3.       Your answer should be relevant to the topic i.e. clear and concise. 4.       Your discussion should not exceed 60 words. 5.       Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course. 6.       Obnoxious or ignoble answer should be strictly avoided. 7.       Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over. Ø       For detailed instructions, please see the GDB announcement. SOLUTION: Three ratios are used to find the liquidity of the firm or company. 1: Current ratio 2: Quick ratio 3: Avg. collection period                                   If current and quick ratio are less than 1 than it is not good for any company.If these are very high than it is also a alarming situation for a company.                                         Avg. collection period is different for every company.                                         current and quick ratios often cause misleadings about condition of a company.